What is Forex?
The Forex (foreign exchange) market is the largest financial market in the world with a daily volume of $5 trillion. It also serves as the primary exchange mechanism for global business and trade. With such a large daily transaction volume, the Forex market offers a wide variety of trading opportunities for people looking to capitalize on the fluctuations of currency values. Forex traders buy and sell different currencies 24 hours a day, 6 days a week, and access increased leverage (purchasing power) in order to speculate on global currency flows and market volatility.
The Foreign Exchange market is commonly referred to as Forex or FX, and it is a worldwide, decentralised, over-the-counter financial market for the trading of currencies.
- It's a worldwide market because you are looking at the relative value of one countries currency against another.
- Global and political events drive these markets, in turn affecting the relative values of a countries currency, which in turn changing the value of the currency pairs.
- Decentralised means there is no centralised exchange, unlike say, the stock market.
- Instead the Financial centres around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.
OVER THE COUNTER: (OTC)
- The currency market isn't controlled by any central governing body, and there are no clearing houses to guarantee the trades.
- Brokers and dealers negotiate directly with one another through electronic networks.
- A market in which dealers negotiate prices amongst them is referred to as Over The Counter
For active traders, the Forex market should be no different than other trading products, such as equities, commodities, or fixed-income. Forex offers traders a market where they can buy or sell a trading product. In this case, it is a specific currency pair. 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.
The different currency combinations represent the value of one currency versus the value of another. That relationship is represented by a single price. In foreign exchange, the price of a currency pair is the market's expectation (at that time) of the value of that currency measured against another currency, given the current and expected economic and political situation in the two economies. In equity terms, it is similar to the price of the stock.
HOW DOES IT COMPARE TO OTHER MARKETS?
While the stock markets have a daily volume in the billions of dollars, the Forex market has a daily volume of more than $4 trillion. Forex market participants include large banks, hedge funds, and other financial institutions, global corporations, and individual traders. The majority of Forex transactions are the result of currency conversions related to the day to day business of the world. The large daily volume of the Forex market provides endless trade opportunities and the ability for traders and to diversify into global currency markets.
What factors come into play when deciding how to trade Forex? How does that compare with trading equities? Let's say, for example, that an economy's inflation rate or interest rates are low and stable, its output is growing strongly, and its politics are stable. One can expect for that country's currency to remain strong versus a less fundamentally favorable currency.
Now, let's compare that with an equity of a particular company. If the domestic and global economy is strong, inflation is not rampant, competition is not taking away market share, product demand is stable, and workers are productive, then you can expect that company's stock to remain strong versus a company with less favorable fundamentals.
Similar to equities, there are other factors that determine the short-term value of a Forex currency pair, including technical analysis, short-term supply and demand, seasonal capital flow patterns, the current price of the instrument, etc. It is these universal dynamics that will move a currency's value up or down. Open a live ThinkForex account to start trading Forex today.