As a trader you can choose sevaral instruments to trade, you can trade stocks, you can trade indexes, commodities, and you can trade Forex. But what exactly is Forex? How do I trade it? What is the Forex Market? We discuss about the popularity of Forex in this article but you first need to understand what is Forex and the Forex Market.
What is Forex?
Forex is a another way to say Foreign Exchange, FX, Currency Exchange and it basically refers to the trading of currencies. So what does trading currencies mean? Assume you have Euro and you need to go on Holiday in the USA, you will need to pay in US Dollars so you will need to buy US Dollars in exchange of Euro. Trading Currencies is fairly simple for an individual, you can go to a currency exchange desk or to a bank. What is less simple is to trade currencies to make a profit, understanding when the price will increase or drop. Again to fix the concept: Forex Trading is that act of buy (or sell) a currency in exchange for another.
What is the Forex Market?
The Forex Market is often called, Foreign Exchange, Currency Market, FX Market. You cannot wake up one morning and say “I am going to trade currencies at the Forex Market“, there is no such market. The Forex Market is not a physical place, it is worldwide. As mentioned before you can go to places to exchange currencies but that is not THE Forex Market, it’s just part of it. The Forex Market is decentralized, this means that there is not a single place Forex Market. The transactions are executed between different parties in several location in the world, this make the Currency Exchange a decentralized global market. Some examples of trades that can happen are:
- The tourist going on holiday in another country, who needs to pay in another currency
- A company that needs to pay goods or services to a company in another country, hence in another currency
- A company that receives payments in a foreign currency, and needs to exchange the funds with a local currency
- Banks and governments to settle debt with other foreign banks or countries
- Traders and investors that trade currencies to make money and speculate
Who are the players in Forex?
As you can see from the examples above you can identify a few players in the Currency Exchange Market:
- Government, that needs to pay other countries or that receive funds in another currency
- Banks, same as the governments, they make and receive payments and sometimes these are in another currency
- Companies, same as above
- Investors and Traders, they trade with the goal of making money from price changes
- Individuals, usually they are very small players, example the tourists
- Brokers, it is not totally correct to include them in the players, in an ideal world brokers should just act as intermediary between the trader and the institution selling/buying currencies, but we do not live in an ideal world and sometimes Brokers assume the role of players
When are the Forex Market operating hours?
The Forex Market is a global decentralized market which means that over the world parties can trade almost at every time. The Forex Market opens at 7 AM on Monday Sydney Time and closes at 5 PM Friday New York Time, this gives traders the opportunity to trade almost 24 hours a day for 6 days. The overlap of timezones and busy hours generates volatility in prices and spreads, generating trade opportunities for the traders.
How to Trade In the Forex Market
The mechanism of trading currencies is different depending on the player and parts involved. Big players like government and banks have transactions directly between them, they do not need brokers and they trade big volumes (big amounts of money). Smaller players like companies, traders and individuals usually need brokers in order to perform a trade, these brokers can be banks or online brokers. Technically it works like any other purchase, you buy a product, in this case a currency, paying a determined amount. For example if the exchange rate of EURUSD is 1.06, I can buy 1.06 USD with 1 EUR, USD is the “product” and EUR is the “payment method”.
How the Exchange Rate is Created
Trading Currencies is fairly simple but if you are reading this article you probably are considering making money with the Forex. The Exchange rate of two currencies is the value of a currency related to another currency, so like before EURUSD 1.06 means that 1 EUR is worth 1.06 USD. The exchange is constantly changing, the rate depends on many factors, it is a combination of economical and political situation, technical analysis, market conditions, news and events happening in the countries and in the world. If it was always easy to predict the trend of an exchange rate everyone trading currencies would be making money.
At this point you should have a fair understanding of what is Forex and what is the Forex Market. This article was only a quick introduction to give you a taste, if you are interested to learn more we suggest you to visit the books section and start reading some literature regarding the topic. In the Forex Trading section you will also find other articles regarding Forex to get some more information about it. If you want to start trading you can read the article about MetaTrader and opening a Demo Account.
You are welcome to leave a comment for feedback or request for more information and we would also appreciate if you follow us on social media.