FOREX EXPLAINED - Your Complete Forex Guide
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market.
The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. Since currencies are always traded in pairs, the foreign exchange market does not set a currency's absolute value but rather determines its relative value by setting the market price of one currency if paid for with another. Ex: 1 USD is worth X CAD, or CHF, or JPY, etc..
The foreign exchange market works through financial institutions, and operates on several levels. Behind the scenes, banks turn to a smaller number of financial firms known as "dealers", who are involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the "interbank market" (although a few insurance companies and other kinds of financial firms are involved). Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity regulating its actions.
The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies and the carry trade speculation, based on the differential interest rate between two currencies.
In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency.
The modern foreign exchange market began forming during the 1970s. This followed three decades of government restrictions on foreign exchange transactions under the Bretton Woods system of monetary management, which set out the rules for commercial and financial relations among the world's major industrial states after World War II. Countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed per the Bretton Woods system.
FX is a 24-hour market because it is decentralised. This means there is no central trading location or exchange. Instead, currencies are traded electronically over-the-counter (OTC), 24 hours a day, five days a week. This is possible because of the different time zones around the world. Overlaps in these time zones means that there will always be traders somewhere in the world making and meeting demands.
The forex market can be split into three main regions: Australasia, Europe and North America. Each of these sectors has their own major financial centres. In Europe, for example, there is London, Paris, Zurich and Frankfurt.
Forex trading is the buying or selling of one currency price for another with the aim of making a profit. The forex market (also known as the foreign exchange or FX market) is the largest and most liquid in the world. Forex traders aim to profit from fluctuations in the exchange rates between different currencies.
Forex is always quoted in pairs because you are speculating on the value of one currency against another. Let’s take GBP/USD as an example. The first currency is the one that you will speculate on. That is to say, you will decide whether GBP will rise or fall against USD and take a position accordingly. If you think GBP will go up in value compared to USD, you would buy. If you think GBP would go down in value compared to USD, you would sell. You can also trade forex as a spread bet or contract for difference (CFD).
The forex market is the largest and most popularly traded market in the world. Over $5.3 trillion worth of currencies are traded globally on the foreign exchange market. On average, that is about $220 billion worth per hour. This trading volume greatly surpasses that of equities and futures markets. The US dollar is the most traded currency and makes up the majority of forex transactions.
The forex market is highly liquid and dynamic. This is advantageous to traders as they are able to enter and exit the market instantaneously. As it is 24 hours, traders can also trade whenever they want, anywhere in the world.
The main currency pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF. These are all included in the major currency
pairs list. Major currency pairs all contain USD as one of the currencies in the pair. Forex is always displayed with
two currencies. This just indicates the value of one currency in the pair against the other.
EUR/USD - euro against US dollar
USD/JPY - US dollar against Japanese yen
GBP/USD - British pound against US dollar
USD/CHF - US dollar against Swiss franc
EUR/USD is the most traded pair overall - it has a daily trade volume of nearly 30% of the whole forex market. Less traded currencies are grouped together into two other sections. These are minor currency pairs and exotic currency pairs.
The major FX markets are open 24 hours a day from 5pm EST on Sunday until 4pm EST Friday. The forex market can be broken up into four major trading sessions. These include the Sydney session, Tokyo session, London session and New York session.
How to Trade Forex
The School of Pipsology is the most popular forex trading course on planet Earth. Maybe even on Mars. Our online course is made for beginners to help them learn how to trade the currency markets. Did we mention it’s totally free?
Want to challenge yourself with some fun trading quizzes? Test your knowledge on a variety of market-related topics and learn some new facts along the way! Your brain will love these quizzes as much as your face loves selfies.
Forexpedia is the original online forex glossary made specifically for forex traders. Enhancing your trading vocabulary is crucial if you want to able to follow the financial markets. Not only can you use it as a reference, but it’ll help you sound really smart at parties.
DailyFX.com, the free news and research website from IG, is one of the world's leading news sources for the currency trading community.
DailyFX analysts report every day on the latest changes in the currency market, providing timely technical analysis and a close examination of promising chart formations with live currency quotes. DailyFX.com also provides analysis of market moves, explaining economic, political, and technical factors driving the market.
This page was last updated April 3rd, 2018 by kim
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