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Forex

Forex

Foreign exchange dates back to ancient times, when traders first began exchanging coins from different countries. However, the foreign exchange itself is the newest of the financial markets. In the last hundred years, the foreign exchange has undergone some dramatic transformations. The Bretton Woods Agreement, set up in 1944, remained intact until the early 1970s. Trading volume has increased rapidly over time, especially after the exchange rates were allowed to float freely in 1971. In 1971, the Bretton Woods Agreement was first tested due to the uncontrollable currency rate fluctuations, by 1973 the gold standard was abandoned by president Richard Nixon, currencies were finally allowed to float freely. Thereafter, the foreign exchange market quickly established itself as the financial market. Before the year 1998, the foreign exchange market was only available to larger entities trading currencies for commercial and investment purposes through banks, but now online currency trading platforms and the internet allow smaller financial institutions and retail investors access a similar level of liquidity as the major foreign exchange banks, by offering a gateway to the primary (Interbank) market. The FOREX refers to the Foreign Currency Exchange Market in which over 5,000 International Banks and millions of small and large speculators participate worldwide.

Each and every day, this worldwide market, exchanges more than $2.2 trillion in dozens of different currencies. With the current growth rate the market is projected to grow to more than $3 trillion per day by the year 2020. With such volume, one can assume that the forex market is extremely volatile, changing at a moment’s notice, depending on conditions within that country.

So, what is forex trading market ? The answers is simple – and complex at the same time. Here, we will go over the basics so that you, the reader, can decide if you wish to learn more. The basic concept behind the foreign exchange (or forex) market is for trading currencies, one pair against another. It’s the world’s largest market, consisting of almost $2 trillion in daily volume and is growing rapidly. The value of one currency is determined by its comparison to another currency via the exchange rate. The major currencies traded most often in the foreign exchange market are the euro (EUR), United States dollar (USD), Japanese yen (JPY), British pound (GBP) and the Swiss franc (CHF). These combine to form the most commonly traded currency pairs:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CHF

The first currency of a currency pair is the base currency; the second currency in the pair is the counter currency. One can think of currency pairs as a single unit. When buying a currency pair, the base currency is being bought, while the counter currency is being sold. The opposite is true when selling a currency pair. Foreign currency trading is conducted without a central exchange, but instead is traded over-the-counter (OTC).

Unlike other markets, this decentralization allows traders to choose from a large number of different dealers or brokers with which to place trades. This also provides the means to compare prices and pip spreads before buying or selling. A number of tools and charts are used in forex currency trading and the educated trader uses these tools extensively to perform accurate analysis to determine whether to buy or sell a given currency pair. The forex market is operated in Europe, Asia and the United States in overlapping shifts, so currencies are constantly traded 24 hours a day.

No single entity has the capability of influencing the market – at least for very long. Currency trading – at its most basic definition – is the act of buying and selling (trading) different currencies of the world. A typical scenario might go something like this: A trader is looking at the British pound (GBP) and U.S. dollar (USD). This is called a currency pair. The GBP is the base currency, and the USD is the secondary currency. News that the value of the GBP is up from previous reports creates a positive reaction and a spike in the value of the GBP. This, in turn, will cause a rally on the GBP/USD currency pair. If the opposite occurred, and a positive announcement for the USD was reported, then the GBP/USD currency pair will fall, or dip. Either scenario can offer up a profit, depending on which part of the currency pair is bought or sold. The price of each currency within the pair is determined by a number of factors, such as changes in political leadership, economic booms or busts, even natural disasters.

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