Chapter 1

The World of FOREX

Introduction—What Is FOREX?

YOU ARE HERE—Before you can test the waters with a demo account, learning basic information about the FOREX markets is essential. Part 1 will accomplish this task with discussions of history, terminology, and regulations.

Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs, for example, the European Euro and the U.S. Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). If you buy the GBP/JPY, you are long the GBP and short the JPY; if you sell the GBP/JPY, you are short the GBP and long the JPY. An account is typically funded with the currency of your resident country. A few FOREX brokers offer the option of funding with a non-local currency.

It is important to understand a FOREX transaction is effectively a spread between two currencies. You cannot simply buy the USD or sell the JPY—the purchase or sale must be in relationship to another currency. This is one of two important facts to remember as we delve into the world of foreign exchange trading.

The FOReign EXchange market (FOREX) is the largest financial market in the world, with a turnover volume of $4 trillion daily. This is more than three times the total amount of the stocks and futures markets combined and almost a doubling in the past five years.

Unlike other financial markets, the FOREX spot market has neither a physical location ...

Get Getting Started in Currency Trading, + Companion Website: Winning in Today's Market, 4th Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.