| The word FOREX is derived from the words | | | | this calculation is derived. |
| Foreign Exchange and is the largest financial | | | | To illustrate a typical FX trade, consider the |
| market in the world. Unlike many markets the FX | | | | following example. |
| market is open 24 hours per day and has an | | | | The current bid/ask price for USD/CHF is 1.2622 |
| estimated $1.2 Trillion in turnover every day. | | | | 1.2627, meaning you can buy $1 US for 1.6327 |
| This tremendous turnover is more than the | | | | Swiss Francs or sell $1 US for 1.2622. |
| combined turnover of the main worlds' stock | | | | Suppose you decide that the US Dollar (USD) is |
| markets on any given day. This tends to lead to | | | | undervalued against the Swiss Franc (CHF). To |
| a very liquid market and thus a desirable market | | | | execute this strategy, you would buy Dollars |
| to trade. | | | | (simultaneously selling Francs), and then wait for |
| The Foreign Exchange market, also referred to as | | | | the exchange rate to rise. |
| the "Forex" or "FX" market is the largest financial | | | | So you make the trade: purchasing US$100,000 |
| market in the world, with a daily average | | | | and selling 126,270 Francs. (Remember, at 1% |
| turnover of well over US$1 trillion -- 30 times | | | | margin, your initial margin deposit would be |
| larger than the combined volume of all U.S. equity | | | | $1,000.) |
| markets. | | | | As you expected, USD/CHF rises to 1.2735/40. |
| "Foreign Exchange" is the simultaneous buying of | | | | You can now sell $1 US for 1.2735 Francs or buy |
| one currency and selling of another. Currencies | | | | $1 US for 1.2740 Francs. |
| are traded in pairs, for example Euro/US Dollar | | | | Since you're long dollars (and are short francs), |
| (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). | | | | you must now sell dollars and buy back the francs |
| There are two reasons to buy and sell currencies. | | | | to realize any profit. |
| About 5% of daily turnover is from companies | | | | You sell US$100,000 at the current USD/CHF rate |
| and governments that buy or sell products and | | | | of 1.2735, and receive 127,350 CHF. Since you |
| services in a foreign country or must convert | | | | originally sold (paid) 126,270 CHF, your profit is |
| profits made in foreign currencies into their | | | | 1080 CHF. |
| domestic currency. The other 95% is trading for | | | | To calculate your P&L in terms of US dollars, |
| profit, or speculation. | | | | simply divide 1080 by the current USD/CHF rate |
| For ease of use, most online trading platforms | | | | of 1.2735. |
| automatically calculate the P&L of a traders' open | | | | Total profit = US $848. |
| positions. However, it is useful to understand how | | | | |