The foreign exchange market (forex) is a worldwide network for trading currencies. The primary participants within this exchange market are the bigger global banks. The world's financial centers serve as trading anchors between a wide variety of sellers and buyers 24 hours a day, Monday through Friday (re-opens Sunday evening). The two primary interbank forex trading platforms are Reuters 3000 Xtra and Electronic Broking Services (EBS).

The forex market operates at several different levels. The banks work with a network of financial companies called "dealers" who take part in considerable amounts of forex business interactions. The majority of forex dealers are also banks, which is why these trades are described as taking place on the "interbank market." However, some insurance companies and other types of financial firms also take part in forex. Forex deals between these large concerns can involve hundreds of millions of dollars. As the dealings involve multiple currencies, there is no supervisory group overseeing its actions.

There is also the margin account market. This involves the smaller companies and retail traders, as well as brokers and wealthy individuals—and most of the people reading this article. In general, forex trading enables the conversion of currency to facilitate international investment and trade.

Forex is divided into two main markets. The Interbank currency market is where larger financial institutions and banks trade with each other; the margin account market is where retail investors and small companies trade with each other.

One example of how forex works involves allowing a European business to import goods from the United States and pay dollars, even though the income of that business is in euros. Forex also facilitates direct speculation regarding the worth of currencies, as well as speculation about the differential in interest rates between two different currencies.

The typical forex transaction involves one party using one particular currency to purchase a quantity of a different currency. The contemporary forex market started to grow during the 1970s, following the lifting of government controls on forex transactions. After World War II, the Bretton Woods structure for money management set the regulations for financial and commercial relations among the major industrial countries in the world, fixing exchange rates. The gradual abandonment of those fixed rates for floating rates made currency exchange a viable investment vehicle.

A forex transaction involves simultaneously purchasing one currency and selling another.

There are several characteristics that set the forex market apart from other investment vehicles. The trading volume makes it the biggest asset class in the world, meaning that liquidity is extremely high. Its geographical spread and continuous operation mean that you can make a trade at any time of the day or night, between 22:00 GMT (Sydney) Sunday and 22:00 GMT Friday (New York). Also, there are a number of factors that affect rates of exchange, such as internal political and economic factors in various countries that do not have the same effect on other types of investments. Finally, forex markets use leverage to boost margins of profit and loss, as well as with regard to size of account.

Key forex characteristics include low costs, high liquidity, 24-hour market, and high leveraged accounts.

To give you an idea of the sheer scale of trading in the forex markets, in April 2013, $5.3 trillion in trades went through each day. This is an increase from $4 trillion in April 2010, and $3.3 trillion in April 2007. The most common forex transaction in April 2013 was a swap, which went through at an average of $2.2 trillion each day. Spot trading was a close second, at $2.0 trillion.

When you purchase a currency, you are considered "long" in it; when you sell one, you are considered "short." When currency values rise or fall in relation to one another, traders will move currencies to bring in a profit. When you place a forex trade, the process is simple, almost the same as what you will find when making transactions in other investment markets.

The forex markets one of the largest markets available for traders, with an average turnover of about $5 trillion a day.

Forex trades are symmetrical, which means that you are constantly "long" in a currency and "short" in a different one. If you hold an open position, it remains live. While your position stays open, its value can move with the market's prevailing exchange rate. To bring your position to a close, you have to execute an opposite and equal trade in the same currency pair.

For example, let's say that you purchase 100,000 euros with a EUR/USD rate of .9600. This means that you gain 100,000 euros and spend $96,000. A couple of months or even a year later, if the rate has gone up to 1.16, you sell those 100,000 euros back and receive $116,000. You've made $20,000.

If you're wondering what EUR and USD stand for, each currency has its own three-letter code. The British pound sterling? GBP. The Mexican peso? MXN. The Russian ruble? RUB. Knowing those codes is important (or at least having the ability to look them up).

Forex involves two currencies paired together, such as the EUR/USD. Each pair is assigned a six-letter code, three letters for each currency.

When you are looking at a trade, the first currency is considered the "Base" currency. So if you're making an MXN/RUB trade, the Mexican peso is your base currency. If your table says MXN/RUB 3.20, you would need 3.2 rubles in order to buy one peso. The second currency (the Russian ruble, in this case) is considered the “Term” currency.

The first currency is called the Base currency and the second currency is called the Term currency. The term currency is the settlement currency, meaning that your loss or profit will depend on this particular currency.

When you’re considering a currency purchase, you’re speculating how the currencies will fare relative to one another. If you are executing a BUY EUR/USD trade, you are using dollars to buy euros. You think that the American economy is going to keep getting weaker, and that this trend will weaken the dollar relative to the euro. In the example above, the trader made $20,000 because the American dollar got weaker. If you place a SELL EUR/USD order, you think that the dollar will get stronger against the euro, and you are selling euros expecting that, after a certain period of time, they will be cheaper than they are now relative to the dollar, and you will be able to get more for the same number of dollars.

A BUY USD/CHF order shows that you think the American dollar is currently undervalued. Your trade buys dollars with the expectation that they will increase in value in comparison to the Swiss franc. However, you might also think that instability in Afghanistan or the Middle East will keep roiling American financial markets, making the dollar weaker. In this case, you would perform a SELL USD/CHF order. This involves selling dollars the expectation that they will go down in value against the franc.

If you are executing a BUY EUR/USD trade, you are using dollars to buy euros. You think that the dollar is going to keep getting weaker in relation to the euro.

 

Bottom Line

Otherwise known as forex or the currency market, foreign exchange is the biggest market available for traders, offering high liquidity, competitive spreads and a 24h market. Forex was original created to cater supply and demand for currencies by governments and financial institutions. Little has changed from then except for its growth in size and accessibility.

 

Summary:

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Forex is divided into two main markets. The Interbank currency market is where larger financial institutions and banks trade with each other; the Margin account market is where retail investors and small companies trade with each other.

 

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A forex transaction involves simultaneously purchasing one currency and selling another.

 

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Key forex characteristics include low costs, high liquidity, 24-hour market, and high leveraged accounts.

 

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The forex markets one of the largest markets available for traders, with an average turnover of about $5 trillion a day. 

 

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When you buy a company share, you essentially own part of the business. Depending on factors like supply and demand, you can later sell the shares with the hope of making profits from the market.

 

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The first currency is called the Base currency and the second currency is called the Term currency. The term currency is the settlement currency, meaning that your loss or profit will depend on this particular currency.

 

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If you are executing a BUY EUR/USD trade, you are using dollars to buy euros. You think that the dollar is going to keep getting weaker in relation to the euro.

 

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