Forex is the short form for foreign exchange. Forex trading is the exchange of one unit of currency for another unit of currency at an agreed price. The exchange for the different units of currency takes place at the over-the- counter market also known as OTC. FX is another name for Forex.
Foreign exchange is one of the tradable asset classes of the financial markets alongside bonds, and Stock. The average turnover of volumes at the Forex market has been the biggest in the world at approximately US$5.3 trillion traded per day.
At the international markets arena, the currency needs to be exchanged to facilitate the transaction of business between Countries. Let’s take, for instance, you live in DC and want to import a BMW from Germany. In Germany currency used is the Euro so you will have to convert your dollars to Euro equivalent of the current price of the BMW to pay for the German machine. That is foreign exchange trade taking place.
The need to conduct international trade is what makes Forex market turnover volumes so big. Speculators and investors use the term Forex trading to refer to the exercise of buying and selling of different currency pairs.
Speculators try to analyze the strength of one currency pair to another, imagine a situation when the sterling pound is expected to have weaken relative to the dollar. The speculator who in this is a Forex trader would sell the sterling and buy the dollar. If in a future date, the strength of pound increases relative to the strength of the dollar, it means the purchasing power of the pound has now been increased. The trader will now buy back the pound and sell the dollar and make the profit from the difference in relative prices.
This is very similar to the stock market. An investor buys stock of a company whose prices he thinks or believes will rise in the future. When the stock value prices rise, he can sell and make profits. Forex trader will buy currency whose price they expect will rise in the future. The opposite is true if a speculator expects the prices or exchange rate of a currency to drop, the speculator will sell.
24 hours Market Place.
An outstanding attribute of the Forex trading is that it happens 24 hours a day five and half days of the week. Forex market is decentralized such that their exist not a central place where the exchange takes pace. All the transactions are conducted electronically online over-the-counter. The transactions are carried out over sophisticated computer networks among currency speculators all around the globe. Forex markets open on Sunday evening and close on Friday evening.
How Forex Trading Works
Multi-nationals, International institutions, and individuals trade the forex market in t wo main ways.
#1.Spot Market – This is where the biggest chunk of trading occurs. Orders for buy or sell are executed immediately or on the spot at present prices. Also known as the “physical market” or “cash market”. Orders are accepted and settled instantly. The current exchange rate price is called spot price.
#2. Forward Market – This is an over the counter market where prices are set for the future. Used mainly for speculation and hedging. A Trader makes an order to buy a currency pair at a future specified price. Market moves and when the specified price is reached, the order is triggered. Forward orders are also called pending orders as the order remains suspended until the market discovers the pre-specified.
This is an aspect of forex trading that makes it very attractive to many investors. Investors can borrow capital to use in buying and selling currency pairs. Most brokerage firms offer leverage of up to 1000:1.This means a trader can borrow 1000 times the value of their account deposit, use it to trade for bigger profit/loss ratios.
What Affect Price fluctuation in the forex market?
The volatility of prices in the foreign exchange market is influenced by a number of factors. International trade between nations, economic policies from institutions such as central banks, Natural disasters like earthquakes or wild fires and Tsunami, the flow of investment into or out of a country and Political conditions all can cause fluctuations in exchange prices. Note that fluctuations in prices present speculators with trading opportunities to position themselves for profit.