Forex Explained

 What is Forex?

Forex trading is the act of trading currencies from different countries against each other. That is, one currency is traded for another. Each pair of currencies constitutes an individual product.

Exchange rates are traditionally noted XXX/YYY. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar. Typically trading occurs between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global forex and related markets was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.

Unlike stocks and futures exchange, foreign exchange is actually an interbank, over-the-counter (OTC) market. No single exchange exists for a specific currency pair. The foreign exchange market operates 24 hours per day throughout the week. This means all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

The Forex (FX) market is one of the largest and most liquid financial markets in the world. The need for a foreign exchange market arises because of the various international currencies such as the US Dollar, Pound Sterling, etc, and the need for trading in such currencies.

During each trading day, the total Forex “volume” is determined by the number of markets that are open and the times each of these markets overlap one another. Forex transactions remain high during the whole day, but is usually highest when the Asian market (including Australia & New Zealand), the European market and the U.S. market are open simultaneously.

A forex trader can choose a currency pair that he or she feels is going to change in value, and place a trade accordingly. Trades are typically placed through a broker. Orders can be placed online with just a few clicks of the mouse. The broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker then closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

What is Liquidity?

Liquidity is the ability of an asset to be converted into cash quickly and without any price discount. In Forex this means that large amounts of money can be moved into and out of foreign currency with minimal price movement. In forex trading, the cost for a transaction is usually built into the price. It is called the spread. The spread is the difference between the buying and selling price.

Access to the Forex market traditionally has been made available only to banks and other large financial institutions. However, with advances in technology along with the industry’s high leverage options, the Forex market is now available to money managers and individual Forex traders. With some initial capital, a computer and internet connection you can become a participant in this global financial market.

Forex brokers allow traders to trade the market using leverage. This is the ability to trade more money on the market than what is actually in the trader’s account. If you were to trade at 50:1 leverage, you could trade $50 on the market for every $1 that was in your account. This means you could control a trade of $50,000 using only $1000 of capital.

Usually Internet-brokers establish a minimum deposit of $2,000, for working in the Forex market. If your broker has established leverage as 1:100, then opening the position at $100,000, you would invest $1,000 and receive $99.000 as a credit. The major currencies traded in Forex, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD).

There is so much more to learn about the Forex market. Hopefully this summary has given you some basic insight to the world currency market.