The Forex or the foreign exchange market is an international market where currencies of various countries are bought and sold by brokers, banks, companies and even individuals.
The main aim of forex trading is to make profits by taking advantage of the foreign currency movements. Trading in foreign currency is always done in pairs, meaning that you sell one currency to buy another. Profits are derived by buying a currency whose value you expect to appreciate and selling it when the price actually rises. One thing to remember here is that there is no physical exchange of currencies in this market.
This market does not operate from a single physical location and is instead run electronically between various banks and brokerage firms on a continuous basis (24 hours), except over the weekends. The forex market’s network is spread across the globe, covering various time zones. Its vast coverage makes it very sensitive to real time events in any location across the globe. Trading in forex or FX is not bound to a trading floor or an exchange as is the case in stocks and future markets. Instead, a network of banks, institutions and brokers operate this market. Forex market provides its participants with access to global dealers at all times.
Traditionally, access to this market was available through banks that used to trade in currencies through a network. The Forex market’s current format was introduced in the 1970s with the introduction of free foreign exchange rates.
Now, anyone from an exporter, an MNC, a speculator, a day trader or hedge funds can use the forex market to make payments, transact in financial assets and reduce the risk of currency movements by hedging their risk. The values of the various currencies are determined by the demand and supply for them. A currency which is high in demand is priced higher while a currency is quoted low if it is not being demanded in large numbers or volumes.
One of the most liquid financial markets, the volumes and the number of traders at the forex market has surged over the past few years. The exact volumes and the amount of money that changes hands through this market are difficult to gauge since transactions are conducted over many regions. A dealer or a trader in foreign currency can open or close his position in a very short period of time due to the vast reach and high liquidity of this market.
A dealer can also maintain a position or hold a currency for any period of time with no set limits. Even though fluctuations in various currencies on a daily basis are insignificant, a trader can use the credit lines offered by the various banks to buy and sell currencies and make profits. The major currencies traded in the forex market are the euro (EUR) the currency commonly adopted by some European nations, the Japanese yen, the British Pound, The Swiss Franc (CHF) and the US dollar.