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Forex Basics - What Is Forex?

By Edited Jun 6, 2016 1 0

The FOReign EXchange market (Forex, FX, or currency market) is a worldwide decentralized financial market for trading currencies. Forex is considered an Interbank market due to the fact that it is run within a network of financial centers around the world, that function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The Forex market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. Forex is the largest financial market in the world. With an average volume of about $4 trillion per day, it completely trumps any other investment, stock or financial market on the planet. The chart below, taken from babypips.com, illustrates the size of the Forex market, in comparison to the world's largest stock markets.

Forex Basics(56235)

How Forex Works

Say you're taking a trip to a different country. Every time you exchange one currency for another, you've basically taken part in the Forex market. You've exchanged one currency for another. Sometimes when you go back and exchange your money again - the rates have changed. It's these rates that allow you to make money in the foreign currencies market.

What Is Happening in Forex Marketplace

In Forex, you're not buying anything physical, but rather investing in a particular country. The price reflects the future health of the economy of that country. If you buy a share of say, Swiss Franc, you're simply betting that the Swiss economy will do better in time. Once you sell those shares back to the market, hopefully you will have made a profit.

Major Players in the Forex Marketplace

1. Banks
2. Governments
3. Corporations
4. Institutions
5. Individuals

Forex Currencies

Currencies are always traded in pairs. Either you're buying say a US Dollar in exchange for a Japanese Yen or you're selling a currency in exchange for buying another. Currencies always have three letters. The first two letters identify the name of the country and the third letter identifies that country's currency. The chart below illustrates the major Forex currency pairs.

Pairs Countries Lingo
EUR/USD Euro / United States "Euro Dollar"
USD/JPY United States / Japan "Dollar Yen"
GBP/USD United Kingdom / United States "Pound Dollar"
USD/CHF United States / Switzerland "Dollar Swissy"
USD/CAD United States / Canada "Dollar Loonie"
AUD/USD Australia / United States "Aussie Dollar"
NZD/USD New Zealand / United States "Kiwi Dollar"

The Benefits of Forex Trading

    •    24 Hour Market - Since the forex market is worldwide, trading is continuous as long as there is a market open somewhere in the world. Trading starts when the markets open in Australia on Sunday evening, and ends after markets close in New York on Friday.
    •    High Liquidity - Liquidity is the ability of an asset to be converted into cash quickly and without any price discount. In Forex this means we can move large amounts of money into and out of foreign currency with minimal price movement.
    •    Low Transaction Cost - In Forex, typically the cost for a transaction is built into the price. It is called the spread. The spread is the difference between the buying and selling price.
    •    Massive Leverage - Forex Brokers allow traders to trade the market using leverage. Leverage 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.
    •    Profit Potential from Rising and Falling Prices - The Forex market has no restrictions for directional trading. This means, if you think a currency pair is going to increase in value; you can buy it, or go long. Similarly, if you think it could decrease in value you can sell it, or go short.


Resources for Learning more about FOREX

http://www.BabyPips.com/school/ - Excellent explanation and terminology about the fundamentals of trading currencies.  

http://www.MeetPips.com/ - Forex trading journal community.

https://www.myFXbook.com/ - An online automated analytical tool for your forex trading account and a social forex community first of its kind. Currently supporting* over 100 brokers, enabling you to track, compare, analyze and share your trading activity.



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