Let's get into what every trader or investor needs to know about Forex. This will be the first of a series of three articles, including charting tools and charting set-ups. The foreign exchange or "Forex" (also called the spot market) is the largest market on the planet. Period. It's average $1.5 trillion to $2 trillion traded per day is almost 100 times that of the $25 billion of the NYSE. Here are some other facts traders and investors should acquaint themselves with about Forex.

The Forex market is open 24 hours, six days a week. Opening Sunday afternoon (ET) and closing Friday evening, the Forex trades almost six days a week. This market does not close between Sunday and Friday.

Let's imagine waking up on Tuesday morning. While you were sleeping, Sydney, Hong Kong, Frankfurt and London were all trading. London is the most active time zone in the Forex market, and it is five hours ahead of New York. Remember that this is a truly global market. As one time zone finishes trading for the day, another is starting. News and short-term fundamentals have very little to no long-term impact because of the 24-hour, worldwide participation.

There is no single exchange where Forex is traded. Besides being open 24 hours a day, the Forex market is as large as it is for another reason: There is no central exchange like that of the New York Stock Exchange or the Chicago Mercantile Exchange. Rather, the Forex market is an "interbank exchange" and is traded electronically through a network of banks, phones and the Internet.

The Forex is a free-floating market. The value of any currency is decided on by supply and demand. Consider that just a little more than 5 percent of the activity is generated by companies and governments that do business in a foreign country and convert one currency to another to buy and sell goods and services.

What of the other 90-plus percent? Purely speculation. Because of the sheer size, there is little chance of market manipulation or a single institution dominating the market. It is for this very reason that the Forex market lends itself so well to charting and technical analysis.

Major banks and corporations trade the Forex. A lot of the reason for the size and liquidity of the Forex has to do with the banks and corporations that participate in this market. This is not a new market; however, it is new to individual traders and investors in the U.S. It is because of the Commodity Futures Modernization Act that we now enjoy access to this Forex market.

For years, though, banks and corporations have participated and profited in this market. The banks that are active in providing market liquidity are Credit Suisse, Bank of America, Goldman Sachs and Morgan Stanley, just to name a few. Corporations take participation in this market very seriously; many have in-house trading or subsidiaries to handle their Forex trading.

There are no gaps in this market and stops are guaranteed. You may be wondering, "Did I read that correctly?" Yes, you did. Because the market has no gaps, you never have to deal with gap opens on Sunday afternoon. The 24-hour trading and massive liquidity virtually guarantee that your stops will be executed with no slippage. Although you should check with your brokerage, most firms offer this guarantee.

While I am a chartist (that means I believe that the news is built into the price action), I do acknowledge that reports can and do affect the Forex markets in the short term. Let's review the reports to keep an eye out for:

	European Central Bank and U.S. Federal Reserve decisions on interest rates
	GDP — Preliminary
	Industry-Sponsored Marketplace (ISM) index and Purchasing Manager's Index (PMI)
	Huge news events, such as elections and war
	Michigan Sentiment (index put out by the University of Michigan)
	Non-farm payroll

When trading Forex, it is important to understand the price quotes. It may seem daunting at first, but I assure you it's easy to understand once you know what you are looking at.

You probably know that the quotes are always presented in "pairs". For example: The USD / CAD. This is the U.S. dollar versus the Canadian dollar. Because the U.S. dollar is the first currency quoted in the pair, it is known as the "base currency" and, therefore, has a value of one. In other words, "1" USD is equal to "x" CAD. If the current quote for the USD / CAD was 1.3910, that would mean that one U.S. dollar is worth 1.3910 Canadian dollars.

Imagine flying to Canada, arriving at the airport and exchanging U.S. dollars for Canadian dollars. This example would be the exchange rate.

There are six major currency pairs to watch. The U.S. dollar versus the Japanese Yen, the U.S. dollar versus the Swiss Franc, the U.S. dollar versus the Canadian dollar, the Euro dollar versus the U.S. dollar, the British Pound versus the U.S. dollar, the Australian dollar versus the U.S. dollar. These six pairs are called the "majors". The majors make up almost 90 percent of daily trading activity.

The first three: The USD / JPY, USD / CHF and the USD / CAD all have the U.S. dollar as the base currency and are quoted like the Canadian dollar example above. The last three: The EUR / USD, GBP / USD, and the AUD / USD all have the U.S. dollar as the second currency and are quoted differently.

When the U.S. dollar is the second currency in the pair, the quote is presented in one base currency equals "x" US Dollar. So, in an example where the EUR / USD quote is 1.1858, "1" Euro dollar is worth 1.1858 U.S. dollars.

When we turn to the charts, we can begin to visualize what the rates mean. Let's return to the EUR / USD example. When this chart trends upward, it actually means that the Eurodollar is strengthening and the U.S. dollar is weakening. In other words, it takes more U.S. dollars to equal one Euro dollar. The same is true for the GBP / USD and AUD / USD.

When the U.S. dollar is the base currency (the first currency quoted in the pair), and the chart is in an up trend, the U.S. dollar is strengthening, and the Canadian dollar, Swiss Franc or Japanese Yen is weakening. So, in the example of the USD / CAD chart, if it is trending up, the U.S. dollar is strengthening and the Canadian dollar is weakening. If the chart is trending down, the U.S. dollar is weakening and the Canadian dollar is strengthening.

A pip is like a tick in the stock or futures market in that it is the smallest increment of point movement. How do you find out which decimal place in the quote is the pip? Look at the number furthest to the right in the quote.

For example, in a EUR / USD quote of 1.1847, 7 represents the decimal place that is the pip. So, a price movement from 1.1847 to 1.1848 would be a one-pip move. All the majors, with the exception of the USD / JPY, have four decimal places, and the pip is the fourth decimal place. With the USD / JPY (U.S. dollar versus Japanese Yen), there are only two decimal places.

The pip ("price interest point") dollar value is different for some majors. The dollar value for each pip in the EUR / USD, GBP / USD and AUD / USD is a fixed $10.00. For the CAD / USD, CHF / USD and JPY / USD, it is not fixed, but, rather, fluctuates between $7 and $8.

Now that we are familiar with the Forex market, in the second article of this series, we'll discuss how to analyze the charts, including the U.S. dollar Index.

*Reprinted (and modified) with permission from Raghee Horner of EZ2TradeSoftware.com