Forex (or short FX) stands for foreign exchange market.
It is the primary over-the-counter market for currencies in the world and trades made on it affect global currency rates. Normally, it is the biggest financial market of its kind.
What is Forex trading?
Trading on Forex is mainly done by large international banks. Currencies are traded in pairs so basically an individual trade will affect rate of one currency in comparison to other.
For example, you will be able to buy or sell euro with dollar thus lowering or increasing its price.
Forex market works on several levels and Forex trading is mainly performed between banks.
Who can do Forex trading?
Forex trading is open to everyone and new parties are free to create a broker account at any time. However, most of the traders are banks themselves (even though they sometimes employ outside services). This is precisely why it’s oftentimes called “interbank market”.
Transactions are usually done in a high volume and lots of capital will flow through it during day.
Best thing about Forex is that it can help international trade.
Through this platform investors are able to buy and sell on foreign markets without taking real risk.
For example, you are able to perform a money investment in euros although you’re dealing with USD in your home country. Needless to say, risks and losses when using through Forex are much lower.
Things you need to know regarding Forex
Here are some interesting facts regarding Forex:
- Assets traded on Forex represent the largest asset class in the world
- Forex works all day long except for weekends
- It has low margins of profit in comparison to some other markets
- Prices formed on this market will affect exchange rate in your country
- It is one of the top economic tools for international trade
- By using leverage you can increase your profits
- Trader can easily place an order online
- It is the most liquid market in the world
- Forex is the closest thing to perfect competition
Currency market characteristics
When it comes to most of the trades performed, there is no central market. There is also limited cross-border regulation. This makes sense if we consider this is an over-the-counter market. In that regard, there isn’t a universal exchange rate but instead have different rates.
Exchange rates are open for analysis and arbitrage.
The main centers for currencies are New York, London, Tokyo, Honk Kong and Singapore. Currency trades are made all over the world and as one region closes, trades start occurring in the next one.
Various factors affect exchange rates including realistic monetary flows and expected monetary flows.
Expected monetary flows are projected based on:
- trade deficit or surplus
- political situation and so on.
Basically, country’s overall financial management. You can even rely on current news to start making some bold market predictions.
How are exchange rates being determined?
Here are some of the things that affect exchange rates.
- Balance of payments – With this factor, you make exchange rate predictions based on tradable goods and services. It mainly ignores capital flows
- International parity – This factor relies heavily on relative purchasing power parity, Domestic Fisher effect, International Fisher effect and interest rate parity
- Asset market model – In this case currencies are used as an asset for constructing investment portfolios. Then, prices are valued by how willing investors are to keep these assets; in other words, how do they perceive profit potential of these assets.
Even though there are various models developed for establishing exchange rates, they don’t manage to explain them thoroughly. There are too many factors to be included so it is really hard to find a universal method that will explain all the fluctuations. Not even experts working in education field are able to find a solution to this issue. In the end, it all comes down to supply and demand of certain currencies on markets such as Forex.
In that regard, exchange rate of a currency has a lot to do with perceived economic stability and/or potential of a country or a region.
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