The global marketplace has changed dramatically over the
past several years. New investment strategies are becoming
more important in order to minimize risk, as well as to
maintain high portfolio returns. Among the most rewarding
of the markets opening up to traders is the Foreign Exchange
market. Identifiable trading patterns, as well as comparatively
low margin requirements, have rewarding trading opportunities
for many.
In
contrast to the world’s stock markets, foreign exchange
is traded without the constraints of a central physical
exchange. Transactions are instead conducted via telephone
or online. With this transaction structure as its
foundation, the Foreign Exchange Market has become by
far the largest marketplace in the world. Average
volume in foreign exchange exceeds $1.5 trillion per day
versus only $25 billion per day traded on the New York
Stock Exchange. This high volume is advantageous
from a trading standpoint because transactions can be
executed quickly and with low transaction costs (i.e.,
a small bid/ask spread).
As
a result, foreign exchange trading has long been recognized
as a superior investment opportunity by major banks, multinational
corporations and other institutions. Today, this
market is more widely available to the individual trader
than ever before.
Spot
foreign exchange is always traded as one currency in relation
to another. So a trader who believes that the dollar
will rise in relation to the Euro, would sell EURUSD.
That is, sell Euros and buy US dollars. Forex-Training.com
has compiled the following guide for quoting conventions:
| Symbol |
|
Currency Pair |
|
Trading Terminology |
| GBPUSD |
|
British Pound / US Dollar |
|
"Cable" |
| EURUSD |
|
Euro / US Dollar |
|
"Euro" |
| USDJPY |
|
US Dollar / Japanese Yen |
|
"Dollar Yen" |
| USDCHF |
|
US Dollar / Swiss Franc |
|
"Dollar Swiss", or "Swissy" |
| USDCAD |
|
US Dollar / Canadian Dollar |
|
"Dollar Canada" |
| AUDUSD |
|
Australian Dollar / US Dollar |
|
"Aussie Dollar" |
| EURGBP |
|
Euro / British Pound |
|
"Euro Sterling" |
| EURJPY |
|
Euro / Japanese Yen |
|
"Euro Yen" |
| EURCHF |
|
Euro / Swiss Franc |
|
"Euro Swiss" |
| GBPCHF |
|
British Pound / Swiss Franc |
|
"Sterling Swiss" |
| GBPJPY |
|
British Pound / Japanese Yen |
|
"Sterling Yen" |
| CHFJPY |
|
Swiss Franc / Japanese Yen |
|
"Swiss Yen" |
| NZDUSD |
|
New Zealand Dollar / US Dollar |
|
"New Zealand Dollar" or
"Kiwi" |
| USDZAR |
|
US Dollar / South African Rand |
|
"Dollar Zar" or "South
African Rand" |
| GLDUSD |
|
Spot Gold |
|
"Gold" |
| SLVUSD |
|
Spot Silver |
|
"Silver" |
Spot
Forex versus Currency Futures
Many
traders have made the switch from currency futures to
spot foreign exchange ("forex") trading.
Spot foreign exchange offers better liquidity and generally
a lower cost of trading than currency futures. Banks
and brokers in spot foreign exchange can quote markets
24 hours a day. Furthermore, the spot foreign exchange
market is not burdened by exchange and NFA ("National
Futures Association") fees, which are generally passed
on to the customer in the form of higher commissions.
For these reasons, virtually all professional traders
and institutions conduct most of their foreign exchange
dealing in the spot forex market, not in currency futures.
The
mechanics of trading spot forex are similar to those of
currency futures. The most important initial difference
is the way in which currency pairs are quoted. Currency
futures are always quoted as the currency versus the US
dollar. In Spot forex, some currencies are quoted
this way, while others are quoted as the US dollar versus
the currency. For example, in spot forex, EURUSD
is quoted the same way as Euro futures. In other
words, if the Euro is strengthening, EURUSD will rise
just as Euro futures will rise. On the other hand,
USDCHF is quoted as US dollars with respect to Swiss Francs,
the opposite of Swiss Franc futures. So if the Swiss Franc
strengthens with respect to the US dollar, USDCHF will
fall, while Swiss Franc futures will rise. The rule
in spot forex is that the first currency shown is the
currency that is being quoted in terms of direction.
For example, "EUR" in EURUSD and "USD"
in USDCHF is the currency that is being quoted.
The
table below illustrates which spot currencies move parallel
to the futures contract and which move inversely (opposite):
Forex
Symbol |
|
Currency
Pair |
|
Futures
Symbol |
|
Directional
Relationship |
| GBPUSD |
|
British Pound / US Dollar |
|
BP |
|
Parallel |
| EURUSD |
|
Euro / US Dollar |
|
EU |
|
Parallel |
| USDJPY |
|
US Dollar / Japanese Yen |
|
JY |
|
Inverse |
| USDCHF |
|
US Dollar / Swiss Franc |
|
SF |
|
Inverse |
| USDCAD |
|
US Dollar / Canadian Dollar |
|
CD |
|
Inverse |
| AUDUSD |
|
Australian Dollar / US Dollar |
|
AD |
|
Parallel |
| NZDUSD |
|
New Zealand Dollar / US Dollar |
|
ND |
|
Paralle |
