Forex or foreign exchange can be defined as a network of buyers and sellers who transfer currencies to each other at an agreed rate. This is how individuals, businesses, and central banks exchange one currency for another — if you’ve ever traveled abroad, chances are you’ve made a foreign exchange transaction.
While many foreign currencies are converted for convenience, the vast majority of currency conversions are done for profit. The amount of currencies converted daily can result in significant volatility in the price action of some currencies. This volatility makes the forex market attractive to traders: it offers great opportunities for big profits, and it also comes with increased risk.
How do the forex markets work?
Unlike stocks or commodities, forex is not traded on exchanges, but directly between two parties in an over-the-counter (OTC) market. The FX market is managed by a global network of banks spread across four major FX trading hubs in different time zones: London, New York, Sydney and Tokyo.
There are three types in the forex market:
Spot forex market: is the physical exchange of a currency pair that takes place at the specified time of settlement of the trade – i.e. H.
FX Forward Market:
A contract is agreed to buy or sell a specified amount of currency at a specified price to be settled on a specified date or within a range of future dates.
FX Forward Market:
A contract is agreed to buy or sell a specific amount of a specific currency at a specific price and date in the future. Forward contracts are bound by regulatory law
Most traders who speculate on foreign exchange rates do not plan to obtain the currency itself, but make predictions about exchange rates in order to profit from price movements in the market.
What is the base currency?
Forex trading always involves selling one currency to buy another, which is why it is included in pairs – the price of a forex pair isIt is the value of one unit of the base currency in buying and selling.
Each currency in the pair is listed as a three-letter code, with the first two letters usually representing the region and the third the currency itself. For example, GBP/USD is a currency pair where the British pound is bought and the US dollar is sold.
What moves the currency markets?
The forex market consists of currencies from all over the world, making it difficult to predict exchange rates as there are many factors that can contribute to price movements. However, like most financial markets, Forex is mainly influenced by the strength of supply and the strength of demand and here it is important to understand the influences that lead to price fluctuations.
For example, quantitative easing means injecting more money into the economy and can cause the price of its currency to fall.
Commercial banks and other investors tend to allocate their capital to economies with good prospects. Therefore, when there is positive news about a particular region in the markets, it will encourage investment and increase demand for that region’s currency.
If the supply of a currency does not increase in parallel, the mismatch between supply and demand causes its price to rise. Likewise, negative news can cause investments to decline and a currency’s price to fall. Because of this, currencies typically reflect a view of the health of the economy of the region they represent.
Market sentiment, which is often a reaction to the news, can also play an important role in rising exchange rates. When traders believe a currency is moving in a certain direction, they act accordingly and can persuade others to do the same, causing demand to rise or fall.