Mon. Nov 15th, 2021

what is Forex

The simplest definition of Forex is that it represents the act of trading currencies from different countries against each other.

Forex is acronym of Foreign Exchange, the very thing that makes possible international transactions such as imports and exports and the movement of capital between countries.

The value of one foreign currency in relation to another is defined by the exchange rate.

Forex trading is done with pairs of currencies, foremost among them being the USD (US Dollar), EUR (Euro), JPY (Japanese Yen), CHF (Swiss Franc) and GBP (Great Britain Pound). Of course it is possible to trade other currencies against each other, but these five represent the most important currencies for world trade, therefore they are known as the five majors.

In any pair the first currency represents the “base” and the second one is the “counter” or quote currency. The value of the base currency is always 1.

One of the Largest Markets in the World

With a daily trading volume that is 50 times larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of these markets, especially liquidity of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.

Traders come from every walk of life and include banks, central banks, currency speculators, corporations, governments, and financial institutions.

The average daily volume in the global foreign exchange and related markets is growing every day.

Daily turnover was reported by the Bank for International Settlements to be over USD 3.2 trillion in April 2007.

Since then, the market has continued to grow. According to Euromoney’s annual FX Poll, trade volumes grew another 41% between 2007 and 2008.

Of the USD 3.98 trillion daily global turnover, trading in London accounted for around USD 1.36 trillion, or 34.1% of the total, making London by far the global hub of foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.

An Exciting and Constantly Moving Market

What really prevents people from entering this market is the seemingly erratic movement of the currencies that almost defy common sense.

For example, it used to be that when a central bank announced an increase in the interest rate, that currency would have to move up compared to the rest.

This is because the investors would be more attracted to it because of higher profits.

But higher interest rate means a lower liquidity on the stock market, which (of course) worries investors and will in fact move that currency down compared to rest.

But this should really not deter you from opening an account with a brokerage firm. With a little bit of method and market analysis you, too, can make more money trading currencies than trading stocks.

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