This chapter presents some of the essentials that you must know when you start trading the forex market. In it we describe the seven major currency pairs that are most commonly traded worldwide and explain how prices move. We also discuss the yen factor, which quotes forex prices in two decimal places as opposed to the normal four. The final part of the chapter defines the value of a pip and explains how margin and leverage affect trades.
The forex game has changed much over the years. Today, it is undisputedly the largest financial market in the world, with a daily trading volume in excess of USD4 trillion. The authoritative source on global forex market activity is the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, published by the Bank for International Settlements (BIS).
Available official figures for daily forex turnover are taken from the last survey done in April 2010. Fifty-three central banks and monetary authorities participated in the survey, collecting information from 1,309 market participants.
An excerpt from the BIS report reads:
The 2010 triennial survey shows another significant increase in global foreign exchange market activity since the last survey in 2007, following the unprecedented rise in activity between 2004 and 2007. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to USD4.0 trillion (from ...