Many people wonder 'what is FOREX' and how it works when it comes to financial markets. Although we are familiar with trading goods for money, the idea of trading money for money might be something difficult to understand. But when it comes to the world economy, selling and buying money is one of the largest businesses. Foreign Exchange (FX) market transactions involve buying a quantity of currency by paying through another currency.

What is forex

Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.

There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Average daily international foreign exchange trading volume was $4.0 trillion in April 2010 according to the BIS triennial report.

Forex Market Advantages

  • Trading leverage
  • Market liquidity 24 hours a day
  • Commission free, very low dealing costs
  • Dynamic movement and opportunities for profit