What is Forex?
The Foreign Exchange Market (Forex) is an international market where you can simultaneously buy one currency and sell another. Currencies are traded through a broker or a dealer in what are called currency pairs. The FX market spans the whole world and stays open 24 hours a day, 5 days a week. The Forex market is the largest in the world.
Unlike other markets the Forex market does not have a central exchange, and has no physical location. The Forex trading market functions by working through a huge network of banks, corporations, and individuals who all trade currencies with each other.
Who Trades On The FX?
A minority percentage of volume comes from large multinational corporations who participate in this market to exchange foreign currencies. A company may need to pay wages and expenses in multiple nations. The currency market allows them to pay these expenses in a different nation from where they produce their products.
The majority of the currency market consists of investors who trade for profit by taking advantage of fluctuations in currency exchange rates. Small fluctuations in currency prices can mean big profits for currency traders. Much like a stock broker speculating on the prices of various stocks, a currency trader speculates on the price of currency.
The Foreign Exchange Market is a true market in the sense that it is impossible to acquire "insider information" like some do with the stock market. The exchange rates are caused by actual monetary flows and people’s expectations of global economic conditions. Unlike the stock market all news is released publicly. Everyone gets all of their information at the same time which effectively levels the playing field for everyone.
A Forex trader trades currencies against each other. Each currency has its own exchange rate and they are traded in pairs. The traditional way to write this out is XXX/YYY. Forex currency symbols always have three letters. The first two letters are the name of the country while the third letter stands for the name of that country's currency.
The first currency is called the base currency. This currency is what you will be using to make your purchase. The second is called the counter or secondary currency. This is the currency that you will be purchasing. For example if you trade USD/JPY you would be using US Dollars to buy Japanese Yen.
What Determines The Price Of Currencies?
The currency market is constantly fluctuating due to ever changing political and economic conditions. The most important factors that can influence a currency market are interest rates, price increases, deflation, international trade, and the current political climate.
There are instances where a government actually participates in Forex trading to try to change the value of their currency. They do this by adding a large amount of their currency to the market to lower its price or they buy up a lot to raise the price in a process called central bank intervention. Doing this may make prices more volatile but the market is so huge that prices level out fairly quickly.
Why Should You Choose Forex Trading?
Forex is much easier to specialize in than something like stocks. The New York Stock Exchange has over 4,000 stocks listed while the NASDAQ has over 2,800. It’s impossible to research all of these. With Forex you have 7 main currency pairs to concentrate on. You can specialize in the currency pairs much easier.
Why Should You Trade Foreign Currencies?
No Commission – Unlike stocks you do not have to pay any exchange fees when you trade currency.
High Liquidity – The Forex market is the most liquid in the world. There are so many trades done that you will never get stuck with currency you can’t get rid of.
A 24 Hour Market – Having 24 hour access to the market means that you never have to wait around for favorable conditions to trade. You can instantly trade as soon as you find a good spot.
Big Business Cannot Manipulate It – The Forex trading market is so huge and wide reaching that even the most powerful banks or countries cannot manipulate prices for extended amounts of time.
Public Information – It's pretty much impossible for big companies to cheat at Forex. Unlike stocks, all Forex information is public meaning that everyone is on a level playing field.
You Can Do It Online – There are 100's of online Forex broker dealers for you to choose from. You have many choices and options at your disposal when trading Forex.
Professional advice should be sought regarding all financial services. These can be obtained from financial advisors and planners who can also advise on financing, loans, accountancy and tax related matters.