Foreign Exchange is the simultaneous buying of one currency and selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen. In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. A short position is one in which the trader sells a currency in anticipation that it will depreciate.
In every open position, an investor is long in one currency and shorts the other. FOREX traders express a position in terms of the first currency in the pair. For example, someone who has bought dollars and sold yen (USD/JPY) at 104.37 is considered to be long US Dollars and short Yen.
The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation.
Today, over 85% of all daily transactions involve trading of the major currencies, including the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
The FOREX market is considered an Over the Counter (OTC) or 'Interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
Trading is not centralized on an exchange, as with the stock and futures markets. A true 24-hour market, FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
