Foreign exchange market is the world’s biggest financial market on which banks, currency speculators, governments, central banks, corporations and other organizations trade currencies. And some 15 years ago, thanks to the Internet, individuals began to trade in the forex market as well. You probably heard that a lot of people make a profit on forex, which makes you wonder what’s the forex market all about.
If we had to summarize forex market in a couple of short sentences only, we would say that these describe forex the best:
- Non-stop trading (24/7)
- Geographical diversity
- Large trading volumes
- Large number of traders
What Characterizes Forex Market
New York stock market is big, but it’s nothing compared to forex as billions and billions of dollars are traded daily here. The geographical diversity and huge number of world currencies allow thousands of traders to work the market and make a profit. Considering that even individuals can trade on this market via Internet and various other platforms, there’s a huge trader base in forex. A large number of foreign exchange traders that make trades 24/7 means that there’s a huge amount of liquidity on the forex market.
There is no central marketplace in forex, all trades are concluded over the counter. So, no matter where you are in the world, you can conduct the trades.
The prices vary depending on the currency instruments and foreign exchange used. Buying checks will have one price while buying currency notes will have another price. Also, buy and sell transaction exchange rates differ.
Currencies Being Traded In Forex
As we already said, every currency of the world can be traded on forex market. But primarily, these 5 currencies are traded with the most:
USD – US Dollar
- EUR – Euro
- JPY – Japanese Yen
- GBP – British Pound Sterling
- CHF – Swiss Franc
The rates of different world currencies are expressed in comparison with another world currency, the one that is more stable and popular. For example, Croatian Kuna is always expressed with the USD.
Factors That Affect The Trade
Besides the factors that influence every trade, demand and supply, forex trades are influenced by some other factors as well. We can classify these factors as:
Economic factors such as prosperity and growth have a positive effect on the currency, whereas budget deficit, inflation or economic slump have a negative effect on the currency. Everything that happens within the country’s economy will affect its currency rate.
Political factors also influence the rate of the currency and how forex trading is performed. Some of them are political assassinations, wars, repression, etc.
Psychology factors include things like rumors, buyer perception of the market and the view of the public on current trends and safety of various currencies.
In the end, lets talk about the trading systems that are used in the forex market. Forward – a system where currencies are being exchanged on a future date. Spot – a system where the currencies are being exchanged within two days. Future – a system where a specific date, rate and currency amount are set to be traded. Swap – a system where 2 parties exchange currencies for a specific time length. Option – a system where the owner of the option can exchange the currency at a specific rate.