Here are the Forex basics: Typically, most people have little interest in economy, finance or earnings on the Internet, and have never heard about the concept of “Forex”. Forex (deduced from English FOReign EXchange, “a foreign exchange”) is the world market of currency exchange.
Although Forex is often referred to as a market where currencies are sold/traded, it is wise to refer to it as a market where currencies are exchanged. For any transaction there is a simultaneous sale of one currency and buying of another. Now, let’s delve into Forex basics in a bit more detail.
Here are the Forex basics of currency pairs: the Forex dealers (who prefer to be called traders) don’t always deal with just one currency, but rather with a currency pair. For example, it can be “the American dollar against the Japanese yen” or “the English pound sterling against the Swiss franc”, etc. Currency pairs are usually denoted as a fraction, where the three-letter designation of currencies is in the numerator and the denominator: USD/JPY, GBP/CHF and so on. Moreover, the procedure of currency pairs is always constant, for example, the “euro-yen,” is always designated as the EUR/JPY, rather than the JPY / EUR.
Each pair has a price, called a quote. A quote shows the ratio of unit-cost of one currency relative to the value of the unit cost of the other. These quotes constantly change under the influence of supply and demand. This is the main similarity between currency and the stock or commodities markets. But there are also significant differences. First of all, the Forex market is not tied to any organization and/or structure, such as the stock exchange. Currency exchange, of course, exists, but those are not major and systemically important organizations, such as the stock exchange in the world of securities markets.
About Spot FX
The largest part of the foreign exchange market is occupied by transactions with immediate execution. However, Forex works with derivatives such as forward contracts, currency futures and options. Nevertheless, the lion’s share of the auction (trading) is made up of instant (or, as they are called, spot) transactions.
Telephone & Internet
The vast majority of transactions on the Forex are carried over the Internet. Some brokers allow their customers to control transactions over the phone, but this rather, is a rare exception, and even then – only applies to large transactions. Actually, before high-speed access to the Internet became wide spread, Forex was almost exclusively traded by professionals. Now in the foreign exchange market practically anyone can engage in a trade.
The market of the middle-aged
It all started in the 1970s, when crisis and the subsequent cancellation of the Britton Woods financial system led to the transition from firm exchange rates of currencies to floating, freely formed prices based on supply and demand. This is how the world currency market was formed. At first, the volumes of trades there was relatively small. Thus, the daily Forex market turnover in 1977 was estimated at approximately $5 billion. But since the beginning of the age of electronic commerce services and instant quotes, the foreign exchange market has been experiencing rapid growth. Thus, in 1992, Forex reached a turnover of $1 trillion dollars per day. And by 2020, the daily trading volume, according to experts, will be about $ 10 trillion. Today, Forex is the largest financial market, at times exceeding the turnover of all stock and futures markets combined.
Who trades on the Forex market? Those are the national banks of different countries, commercial banks, various investment, hedge, and pension funds, individuals, both professional and amateur traders who often trade Forex even simply for fun.
Important participants of the foreign exchange market are the brokerage companies. Their task is ensuring access of traders to the market. Brokers provide their clients with trading software, datafeeds with quotes for different currency pairs, and also store deposits of traders as well as pay their profits. Both specialized companies and some commercial banks can act as brokers.
Not only speculation
In fact, in the foreign exchange market there are two types of traders. Some make operations just for the purpose of exchanging one currency for another (for export-import transactions, currency reservation, etc.). Others buy and sell, sell and buy currency pairs for the purpose of receiving profits through favorable movement in quote prices.
Secret of success
Understanding the Forex basics isn’t all you need. Certainly, market prices don’t always change in favor of the trader. Therefore, the foreign exchange market will not only earn, but also often lose a lot of money. But it doesn’t mean that earnings on the Forex market are available only to super-professionals. Do not believe the idle gossip claiming that Forex – is a lottery, or worse – “a scam”. Now that you have read on the Forex basics, have a look at the other materials out there – this should give you more insight regarding where to move with your trading. Simply, many novice currency traders forget (alas, sometimes with the help of unscrupulous brokers), that to be successful in the Forex field (as well as almost any other), one needs to have knowledge, labor, patience and a little luck!