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NO01 - What is Forex?

"When it comes to the financial markets, you might have heard about stocks and bonds. But there is another market that deals with the currencies, known as the forex markets. This is one of the biggest markets there is in the world, with average daily turnover of about $5 trillion. Learn how you can be a part of this huge market. Forex trading is all about speculating in the currency markets where one currency’s performance is seen in relation to the other. This article gives you the basic foundation of what forex, or foreign exchange markets is all about. The article, what is forex, lays the foundation to the basics of the forex markets and will help you understand further on the terminology used in forex and what you need to know to be a successful forex trader. This is the first step in your education towards understanding how the forex markets work."

Forex or foreign exchange markets is a type of financial market that involves currency transactions. Because money forms the basis of any financial product, the foreign exchange or the forex markets are vital.

From supporting the global trade, to the final settlement that occurs in the derivatives, stocks and bond markets, it is not surprising to note that the forex markets are one of the largest markets.

Boasting of an average daily turnover in trillions, the currency markets dwarfs just about any other market that you could know.

Just as any financial market, the forex markets also have their own set of rules in regard to how you can trade them and how they are transacted. There are also distinct features that sets aside the forex markets from the rest.

Who are the major participants in the forex markets?

The forex markets are primarily dominated by banks. Banks are the key institutions that enable the flow of currencies and its transactions. This is also what is commonly referred to as the Interbank markets.

While banks are the central point in the forex markets, the participants or the beneficiaries are made up of average people and of course companies. When a company, such as an export or an import company purchase or sell goods abroad, there is a need to convert their local currency into the foreign currency or vice versa.

Similarly, if you were to take a vacation abroad, chances are that you will also convert your local currency into foreign currency and vice versa when you are back from your vacation.

These simple transactions that we take for granted are nothing but transactions in the forex markets.

Why are the forex markets important?

The forex markets are important for a number of reasons. To begin with, it is the global trade that fuels the respective economies in the world. Countries trade their goods and services with one another.

Because different economies have their own currencies, there is a need for converting one currency to another and vice versa. Central banks also form a vital element within the forex markets.

They are tasked with maintaining price stability and ensure that the economy is growing. This is done by changing the monetary policies. The monetary policies, in turn have an effect on the value of a currency.

Usually, countries that export goods prefer to have a weaker currency relative to the other. This allows them to earn more in the local currency. Likewise, countries that import goods prefer to keep their currency high as it fetches more goods and services.

As you can see, there is a close relationship between the economy and the currency. The study of this relationship is nothing but the currency markets.

Because of the ever-changing dynamics, made up of economic and monetary policies and other data, the currency markets always change in value. This makes the exchange rate of one currency to rise or fall in relation to another currency.

As a result, it creates unique trading opportunities for you as a currency or a forex trader.

Can you trade the forex markets?

Yes, you can participate in this massive market.

As a retail trader however, you can only speculate in the markets. Speculation in the forex markets is simply betting whether one currency will appreciate or depreciate in value against the other currency.

This makes the forex markets more unique than other markets, which we will cover in the later sections.

As a speculator you cannot expect any delivery of the underlying currency. This makes it a bit different to say trading stocks, where you get the delivery of the stocks or the shares when you invest in them.

Because the currency or the forex markets are so volatile, it allows traders like you to take advantage of this volatility in order to make money. But at the same time, the risks are also equally high. Thus, you can easily make and lose money trading in the forex markets.

Unlike most other markets, the forex markets are open 24 hours a day and operate 7 days a week. But this shouldn’t be surprising considering that the currency markets basically cover the whole globe.

Thus, at any point you can buy or sell currencies, regardless of whether it is day or night.

Even before you begin to trade forex, you need to have a good understanding of the fundamental and technical aspects of the currency markets. This first section gives you a small taste of things to come.

Read 1766 times Last modified on Friday, 03 May 2019 11:07
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