Money

When it comes to smart investing, all world news is forex news

Forex traders know one of the advantages of their field is that the forex market is open 24 hours a day, five and a half days a week. But a 24-hour marketplace means there’s forex news coming in constantly, too. With so much information coming from so many markets literally at all hours of the day, it can be hard to keep up with all the news available to you.

But at the same time, an informed trader is a successful trader. To make informed decisions on when to buy and sell currencies, you’ll have to keep an eye on all the news you can get your hands on. Many Web sites make it relatively easy for you by corralling the forex news into one place, often dividing it into subcategories for easy navigating. Any forex trader, whether new or experienced, should find a news source he likes and check it often.

Many of these forex news sites also offer commentary and analysis, beyond just a simple ticking off of the latest rates. Here you’ll find experts talking about the issues involved and perhaps offering insights beyond what you would have come up with on your own. Some news sites charge a registration fee for access to all their materials, but it can be worth it in the long run.

Aside from running 24 hours a day, another reason there is constantly a stream of forex news is that so many factors can influence a currency’s strength. Natural disasters, government actions and other things -- both foreseeable and not foreseeable -- can cause a nation’s currency to go up or down in relative value. An experienced trader will look at all this news and know how to predict what effect it will have.

Often, forex news isn’t labeled as such. Any economic news at all can affect the forex market; a sharp-eyed trader is on the lookout constantly for news that might impact his trading. In other words, a good trader will have to be an expert on world affairs, monitoring political, social and other developments in other countries. All of this, combined with the more specific forex news dealing with the details of exchange rates and so forth, gives you the information you need to be successful at currency trading.

The basics of reading a forex quote

The foreign exchange market can be a baffling place for newcomers, and one of the sources of confusion is the forex quote. A forex quote is a small bit of information, yet it’s packed with numbers that may not make sense to someone unfamiliar with the forex system. Here’s a basic explanation of how it works.

A forex quote consists of a currency pair -- forex deals always involve simultaneously selling one currency and buying another -- a bid price and an ask price. For example, one quote might be this:

USD/JPY 118.71/75

The first currency is the base currency, and the other one is the quote currency. The value of the base currency is always 1 -- in this case, 1 U.S. dollar. The number tells you how many of the quote currency (the Japanese yen, in this case) you can buy with $1.

But what kind of number is 118.71/75? It’s actually forex shorthand for two numbers: 118.71 and 118.75. The lower number is the bid price, the other is the ask price. The bid price is the price that dealers will buy the base currency for. The ask price is what dealers will sell it for. 

So if the above were the current quote, it would mean right now, you could SELL U.S. dollars in exchange for 118.71 yen per dollar. Or, if you preferred, you could BUY U.S. dollars at a rate of 118.75 yen per dollar.

The difference between the bid price and the ask price in a forex quote is called the “spread,” and those tiny units are called “pips.” In our example, the spread for USD/JPY was four pips. The spread is usually that small for the most commonly traded currencies, which means anything involving the U.S. dollar, Japanese yen, Great British pound, the euro, Swiss franc or Australian dollar. In fact, thanks to the great competition in the forex trading market, some quotes will have spread of as little as one pip.

Of course, for less commonly traded currencies, the spread can be much greater. And even when the quote delivers a small spread, it adds up when you’re trading hundreds of thousands of units. If you were dealing with 100 U.S. dollars, the difference between selling them for 11,871 yen and buying them for 11,875 yen wouldn’t be much at all -- just four yen. But if it were 100,000 U.S. dollars, suddenly that four-pip spread means a 4,000-yen difference. So the spread in a quote is more important than its smallness would suggest.

What a forex rate is and how to read it

When we talk about the forex rate, we’re talking about the relative value between two currencies -- how many of one the other is worth, in other words. For forex traders, the forex rate is the basic information they use to do their job. The rate is to a forex trader what nails are to a carpenter.

If you plan to get involved in forex trading, reading and understanding the forex rates is absolutely vital to your success, like learning the basics of addition before becoming a mathematician.

A forex rate is always expressed in pairs, followed by a number. The number is how many of the second currency you’d get for one of the first one. For example, you might see USD/EUR: 0.7928. That means that one U.S. dollar is currently worth .7928 euros. If you were to exchange $100, you’d get 79.28 euros for it. Since the number in this rate (0.7928) is less than 1, that means the second currency is currently stronger than the first one -- that is, the euro is stronger than the U.S. dollar.

Forex traders look at rates constantly throughout the day. They carefully examine trends in various currencies’ performance, noting which are going up and which are going down. If a rate suggests, say, that the British pound is starting to increase in value compared to the euro, a trader might swap his euros for pounds. Then, when new rates show the pound has become very strong, he can swap back again, turning a profit because the pound is now worth more than he “paid” for it.

Forex rates are available everywhere on the Internet. Casual observers to the forex trading industry might glance at them for reference on hundreds of different Web sites. Regular traders, though, usually own software that keeps them up to date on rates throughout the day, without having to visit a particular site to get them.

This is important, because rates change constantly, and can be influenced by a wide variety of economic and political factors. The overall change over the course of a day usually isn’t more than a few percentage points either way, but there are minor changes regularly, and those minor changes add up in the long run. Experienced traders watch the rates for those tiny fluctuations, carefully observing whether there is a general upward or downward trend that requires their attention.

Covering the basics of the forex market

The foreign exchange, or forex, market is relatively young, having begun in the early 1970s after the United States dropped the gold standard and national currencies started to fluctuate widely. For about 30 years prior to that, most nations had agreed to keep their currency values stable in relation to the U.S. dollar, making a forex market unnecessary. With that no longer the case, banks quickly realized that a profit could be made in “buying” currency when it was devalued and “selling” it after it strengthened, just like any other commodity.

Today, the forex market handles about $1.9 trillion in transactions every day, and it runs 24 hours a day, five days a week. (With nations around the world involved, it’s always daytime somewhere.) The most traded currencies are the U.S. dollar, the euro, Japanese yen, British pound, Swiss franc and Australian dollar.

The forex market is overwhelmingly dominated by international banks, government banks, investment banks, corporations, and hedge funds. In fact, individual traders account for only about 2 percent of the market. Nonetheless, a lot of people do try their hand at it, with varying degrees of success.

In the forex market, transactions are always handled in pairs: You buy one currency and sell another one. The idea is to make a trade when you believe the currency you’re buying is going to go up in value compared to the one you’re selling. Then, if it turns out your prediction was correct, you do another trade in the reverse direction -- selling the currency you originally bought and buying the one you sold -- in order to reap the profits.

For example, let’s say the market reports this: GBP/EUR 1.2200. That means the cost of buying one British pound is 1.22 euros. If you believed that course was going to change, and the euro was going to become more valuable than the pound, you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let’s say a few weeks later, the exchange rate fluctuates to this: EUR/GBP 1.3100. Sure enough, the euro is now worth 1.31 pounds, a profit of 0.11 per unit.

The forex market is vast and daunting and mostly inhabited by giant organizations. But it can be navigated by individuals who have studied the finer points and who want to take a risk on something potential profitable. And since the whole world uses money, the trading of that money is always going to be a major force in the financial world.