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What Is The Foreign Exchange Market?

  Foreign Exchange Market

What Is The Foreign Exchange Market?

The foreign exchange market is also known as the forex market or the currency market.  It is one of the largest financial markets globally with a daily volume in excess of $4 trillion.  To trade in this market you must ensure that you know everything about the market.  It is possible to enrol on suitable forex courses online, or you could opt for various books and publications to obtain a solid grounding in the market.

The Trade of the Foreign Exchange Market

You trade money in the forex market.  You simultaneously buy and sell different currencies.  For example, if you wish to trade the EUR/AUD.  When you buy this currency pair, you are in effect buying the euro and selling the Australian dollar.  Upon purchasing the euro, it is stated that you are going long, and when you sell the euro, it is said that you are going short.

There are seven major currencies that account for about 80% of the trading volume in the market.  These are:

  • USD – United States Dollar
  • EUR – Euro
  • GBP – British Pound
  • CHF – Swiss Franc
  • JPY – Japanese Yen
  • CAD – Canadian Dollar
  • AUD – Australian Dollar

How Does The Forex Market Differ To Other Markets?

Unlike stock trading, forex trading does not have a central exchange, such as the New York Stock Exchange.  It is not regulated by a central body.  There are no clearing, exchange or brokerage fees payable.  Forex brokers make their money on the variance between the price you pay to buy a position, and the price you receive when you sell that position.  This market trades 24 hours per day, five days per week.  This allows you to trade at any time of day or night, regardless of where you are in the world.

There is no limit placed on the amount of currency you can purchase.  It is an easy to buy and sell market and due to the size and liquidity of the market, you will never be stuck with an item you cannot get rid of.

Profit or Losses

The conversion of your money into another currency means that you are placing your hopes on the purchased currency experiencing a rise in value.  The idea is that when you sell that currency, you will have more money in your hand than you started with.

An example of this is if you purchased US dollars with Australian dollars.  Let’s say that you spent AUD1000 and received USD900.  A few days later, you decide to sell your US dollars and you receive AUD1100 for it.  This is possible with the constant rate fluctuations in this market and this is the aim of trading in this market.

Currency Quotes

In the forex market, currencies are normally quoted in pairs.  An example of this is USD/AUD.  Using this quote, the value of one currency is calculated by comparing it to another currency.  The first currency in a pair is termed the base currency, and the other currency is the quote currency.  The pair indicates how much of the quote you need to buy a single base currency amount.

This is an extremely exciting market where it is possible to make huge profits, but at the same time, you can also make huge losses.  You have to be careful when you enter this market as you need to know what you are doing and have to use effective strategies to trade the market.

 

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