Foreign Exchange Market Basics
We will look at foreign exchange basics or the Forex market. There are many things you need to know about the foreign exchange market. In order for you to become a successful Forex trader, you will need to understand how it works as well as take practical steps to reach your goal.
You will come across several different terms for the forex market. Forex and fx are both short ways of saying ‘foreign exchange’. It may also be called the currency market, the foreign currency market, the currency trading market, etc. All of these terms refer to the same international market on which the currencies of the world are exchanged and traded.
Since there is no particular location for the Forex market, almost every country can deal in the marketplace. Almost every country does trade in currencies on the Forex. For this very reason, the foreign exchange market is open 5 days a week, 24 hours a day. You can trade currencies somewhere in the world when it is open. The week begins on Monday morning in Sydney, Australia. This is Sunday, 5pm EST in the United States. On Friday in New York at 4pm EST, the week ends.
The forex market is a surprisingly recent phenomenon. Up until the 1970s, currencies had been stable relative to one another since the second world war. What was called the ‘gold standard’ gave every currency a value in relation to the US dollar. This system was introduced in order to maintain a stable world economy.
However, when the USA discarded the gold standard in the early 70?s, the values of various currencies began changing. Rather than only making exchanges when they needed to transfer money from one country to another, the banks instantly began exchanging currencies for profit by buying low and selling high. The result was every currency became a commodity of trade. This is how Forex trading began.
The value of a currency is, in a sense, the value of the nation whose currency it is, so just like companies on the stock exchange, if a nation is successful the value of its currency increases and if it is going though a crisis the value drops. These fluctuations can be great and can happen very fast. The sums involved can be huge too. The total value of transactions on the forex market now averages almost $2 trillion dollars a day.
These foreign exchanges involve many large financial institutions, such as investment and international banks as well as other types of major corporations. However, many private individuals do trade on the Forex using a broker. Using the internet and online trading are also very popular today. Scores of individuals use their online computer to trade on the Forex. Their trades are often smaller than some other large institutions, these individual traders rank at about 2% of the total Forex market.
Most often exchanges involve the US dollar against other currencies such as the Euro, Japanese yen, Australian dollar, Swiss franc and the British pound. However, it is possible to trade any currency against another. Many individual traders may use automated Forex robots to concentrate on lesser currency pairs such as the Euro against the pound.
Many individual traders may feel small when considering the larger companies, since the Forex is such a huge marketplace. However, anyone is welcome on the market to trade or exchange, when he or she has a little capital to risk. When you deal with a broker, they may allow you to start with as little as $250. You should consider getting some practice by using a Forex demo account when you first begin learning the foreign exchange basics rather then investing any real money until you feel secure in doing so.
