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Foreign Exchange or FOREX is the financial market where a nation's currency is exchanged for that of another. Traditionally, private traders only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes.
Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US equity and bond and commodity markets combined.
According to David Krutz from the Financial Times website (Published: October 9 2006 20:48) "The foreign exchange market will have doubled in size in just three years next year, thanks to increased participation by fund managers and pension funds, says research out on Monday".
Where is the Central Location of the FX Market?
Unlike other financial markets such as the stock and futures markets, the Forex market has no physical location and no central exchange; this makes the Forex market an OTC or over-the counter market. It operates through a global network of banks, corporations and market makers trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one time zone to another in all the major financial centers of the world.
What is traded on the Foreign Market?
The answer is simple: Currencies! Foreign exchange offers a market where you can buy and sell currencies. Forex trading is the simultaneous buying of one currency and the selling of another and is always done in currency pairs representing nothing more than the value of one currency versus the value of another. The currency pair may be the Euro versus the US Dollar, the US Dollar versus the Japanese Yen, the British Pound versus the US Dollar, the Euro versus British Pound, or a number of other currency combinations.
Some examples:
Image source: Forex Capital Markets
Which are the most popular currency pairs to trade?
Most popular pairs to trade are the Euro/dollar, Dollar/Yen, Pound/dollar and Dollar/Swiss Franc. (more covered in another lesson)
How to trade currency pairs online?
You can trade currency pairs through an online foreign exchange trading platform. All you need is a computer and a high-speed internet connection. You can register with a forex broker for a free demo account and start practicing!
Trading platform example:
Image source: Forex Capital Markets
Forex Market participants
Before the year 1998, the foreign exchange market was only available to larger entities trading currencies for commercial and investment purposes through banks, now online currency trading platforms and the internet allow smaller financial institutions and retail investors access a similar level of liquidity as the major foreign exchange banks, by offering a gateway to the primary (Interbank) market.
The FOREX refers to the Foreign Currency Exchange Market in which Banks, Commercial companies, Central banks, Investment management firms, Hedge funds and millions of small and large speculators participate worldwide. |
