What Is Forex Trading?
The money market, also known as the Foreign Exchange or Forex market, is one of the most exciting and fast-paced investment arenas in the world. Until recently, trading in foreign exchange had remained the preserve of major financial institutions, hedge funds, corporations, central banks and extremely wealthy individuals. With the advent of internet trading, everything has changed – It is now possible for the average retail investor to buy and sell currencies from the comfort of their home, or on their mobile device with a click of the mouse, thanks to online brokerages and platforms such as metatrader. In this article, we examine the Forex meaning, how currencies are traded and why this financial market is so popular.
What Is Forex?
The foreign exchange (or Forex) market is a “place” where one currency is traded for another. Currencies are the cornerstone of trade around the world, since money needs to be exchanged for goods or services while conducting legitimate international business transactions. The need for currencies to be exchanged in these types of transactions is the reason why the Forex market has grown into the largest and most liquid of the world’s financial markets. It even towers over all the other legitimate financial markets – including the stock market – and has an average trading volume of more than 6 trillion dollars per day.
One aspect that makes the Forex market unique is that there is no centralized marketplace where international currencies are traded. Instead, trade in currencies is carried out electronically over-the-counter. What this means is that Forex transactions are conducted through computer networks between legitimate traders and brokers around the world, instead of within a centralized exchange.
When looking to find the Forex meaning, you must understand that the Forex market operates 24 hours a day, five and a half days a week. Worldwide currencies are heavily traded in the financial capitals of the world including New York, Tokyo, London, Zurich, Hong Kong, Singapore, Sydney, Paris, and Frankfurt. The result is that when trading closes in the US, the market awakens in Hong Kong and Tokyo. For this reason, the Forex market is always active and price quotes, on commonly traded currency pairs, keep changing constantly.
Drivers of the Forex Market
Daily fluctuations in currency pair values are normally very small. In fact, traders will find that most major currency pairs move less than 1% each day. This means that the Forex market is one of the least volatile of the global financial markets. Because of this, most speculators in the trade have learned to depend on the availability of huge leverage to boost the value of the currencies’ potential movements.
Within the retail Forex market, it is possible to find leverage ratios as high as 250:1. Higher leverage can be a benefit but often proves extremely risky. However, round-the-clock trading, foreign exchange brokers and deep liquidity make this kind of high leverage an industry standard.
The high levels of liquidity and leverage have been key in spurring the market’s growth, making Forex trading an ideal investment. Positions could be opened or closed in just a matter of minutes or, alternatively, they could be held by the trader for months.
If you want to know the Forex meaning, the information above is a good place to start. Just like in the stock market, you can buy or sell currencies based on what you think the currency is worth now (or will be worth in the future). If you think a currency’s value will rise, you buy and if you think the value will drop, you sell it. Because the Forex market is so large, it is much simpler than other markets to find a buyer when you are selling and to find a seller when you want to buy.