Forex, or foreign exchange (FX) is a decentralized market where the currencies are traded. Forex works the same way as markets with other financial securities such as bonds or stocks, except for FX being the most liquid market of all. The daily trading volume of forex exceeds $5 trillion, which is much more than daily sums circulating through stock exchanges. The major trading centers are located in huge cities such as Sydney, New York, London, Zurich, Frankfurt, Singapore, Hong Kong, Tokyo.
What is Forex Transaction?
The basic logic behind any forex transaction is the exchange of one currency to the other. For example, going on vacation to a foreign country, one has to buy a currency of that country in an exchange for the currency of one’s native country. However, when trading currencies on forex, the main aim is to gain profit on the exchange rate fluctuations. When talking about $100, it does not make a big difference whether 1 euro costs $1.16 or $1.18. When talking about huge sums of money, the bottom line can be greatly influenced by this seemingly tiny difference. So, here are the main peculiarities of Forex:
Forex market is active 5 days a week 24 hours a day
Forex trading is conducted in an over-the-counter way
Timing is important
Understanding currency pair volatility is crucial
Average daily range of each particular currency pair is to be considered as well
Knowledge of technical indicators is important.
How Does It Work?
The trading is done between the two selected currencies that form a currency pair. If you think that a particular currency is about to decrease in value against another currency due to some economic reasons, you sell it. However, if the currency increases in value, while you keep the selling positions open, you incur losses. In this case, you may want to stop trading. The most popular method of forex trading is spot trade. Buying and selling currencies “on the spot” means buying and selling them at current prices with instant delivery. The price of any currency is based on levels of inflation, interest rates, political stability, and many more.
The Importance of Forex for Global Economy
Foreign trade and business can have huge profits from foreign exchange. At the same time, FX provides individual investors with an opportunity to increase personal profits. Even in the condition when global economy is staggering, forex traders can still make large investments and earn good profits. Considering the fact that the majority of people exchange money to make international payments, it is clear that FX facilitates international trade. With all trading procedures conducted over the counter (through phone, or via the Internet), the two parties can do business without being in close geographic proximity. This way, forex trading with trillions of dollars of a daily turnover shapes the face of global finance and economy.