What is Forex Trading?

One of the biggest reasons why people never get started investing in the Forex or foreign exchange market is because they don’t really understand what it is. First off, the Forex market can be defined as the simultaneous buying of one currency and selling of another. It is actually quite a simple process that just takes a little understanding in order to take advantage of this market.

In this investment market currencies are traded through either a broker or a dealer and are done in currency pairs. An example of a currency pair that might be traded would be the Euro Dollar and the U.S. Dollar. It is a very simple concept and has been around for a long time now for those who have known about it.

The term FOREX comes from the phrase FOReign EXchange. It is the world’s largest financial market, with an average daily turnover of approximately $3 trillion. Many people may not know this but that is more than three times the total amount of both the stock market and futures market put together. The foreign exchange market is open from 20:15 GMT on Sunday until 22:00 GMT on Friday. This makes it available to trade on 24 hours a day throughout that entire week. This is done because it is a de-centralized market with traders from every region of the globe.

One thing that sets the Forex market apart from other financial markets is that it is considered a spot market and has neither a physical location nor a central exchange. The way that it operates is through an electronic network of banks, corporations and individuals trading one currency for another. For this reason, it enables the Forex market to run on a 24-hour basis, spanning from one time zone to another across all the major financial centers. In order to fully understand the Forex market, you need to always keep in mind that there is no centralized exchange because it in dwells all aspects of the foreign exchange experience.

Spot Market Basics

The definition of a spot market is any market that deals with the current price of a financial instrument. For example, futures markets, such as the Chicago Board of Trade, offer commodity contracts whose delivery date may span several months into the future. With the Forex market, spot transactions usually occur within two business days.

In the Forex market, futures and forwards can also be traded. However, an overwhelming majority of the traders use the spot market. Most like the fact that with the spot market, transactions are done much quicker without having to wait for several months. Since this market deals with current prices, it needs to be done quickly in order to make sure it keeps up with the current market.

Who Trades FOREX?

There are really two major groups that trade currencies in the foreign exchange market. The smaller percentage of daily trading volume is from companies and governments that buy or sell products and services in a foreign country. This means they must subsequently convert profits made in foreign currencies into their own domestic currency throughout doing the business.

For the most part, this is considered hedging activity. The main portion of volume now comes from investors trading for profit or speculation. These investors range from large banks trading 10,000,000 currency units or more, to home-based operators trading 10,000 units or less.

The speculators trade to make profit by purchasing one currency and at the same time selling another. The hedger trades to protect his or her margin on an international transaction such as adverse currency fluctuations. The hedger in this market has an intrinsic interest in one side of the market or the other, however, the speculator does not. Speculators add liquidity to the market, making it much easier for everyone to transact business by setting efficient prices.