The foreign exchange market, or forex (FX) for short, is a decentralized marketplace which makes it easier to buy and sell various currencies. This occurs over the counter (OTC) rather than on a centralized exchange, through the interbank sector.
By purchasing imported sneakers or, more obviously, buying foreign currency while on holiday, you have actually already invested in the foreign exchange market. For many factors, traders are attracted to Forex, including: the scale of the demand for FX, a diverse selection of exchange currencies, volatility rate, low purchasing prices, and 24-hour trading a day throughout the week.
If you are brand new to forex trading or seeking to expand on your current experience, this article aims to provide the foreign exchange industry with a strong base.
The Foreign Exchange Industry
The foreign exchange industry, in a nutshell, operates as most other economies in that it is subject to demand and supply. Using a very simple illustration, if European people carrying Euros have a strong desire for the US Dollar, they would swap their Euros for dollars. The value of the US Dollar is going to increase whilst the value of the Euro is going to decrease. Notice that this trade only impacts the currency pair of the EUR/USD and would not trigger the USD to depreciate against the Japanese Yen, for example.
What drives the Forex Market?
In truth, only one of several factors that can drive the FX market is the above illustration. Others involve major macroeconomic phenomena, such as the inauguration of a new president, or country-specific indicators, such as the prevalent interest rate, GDP, unemployment, inflation, and, to name a couple, the debt-to-GDP ratio. To keep up to date with these and other major economic releases that can drive the sector, top traders use an economic calendar.
Why is Forex trading an attractive investment?
The foreign exchange sector enables the exchange of one currency for another through major entities, states, merchants and private individuals and takes place through the interbank market (between banks).
The advantage of forex dealing amongst global banks is that it is possible to exchange forex around the clock (during the week). Before handing over to the US, the European and UK banks come online as the trading session in Asia draws to an end. When the US session leads into the Asian session for the next day, the complete trading day stops.
What makes this sector much more appealing to traders is that, according to the BIS Triennial Survey 2016, it is by far the most liquid market in the world, with an estimated regular trading amount of $ 5.1 trillion. This ensures that, since there are many eager buyers and sellers for foreign exchange, traders will quickly join and leave positions.
How does Forex Trading work?
Many people are curious how to earn money from forex trading. The fundamentals behind forex dealing, thankfully, are very clear. If you believe a currency’s value is going to go up (appreciate), you are purchasing the currency. This is regarded as “going long.” You sell the currency if you fear the currency is going to go down (depreciate). This is regarded as “going short.”
In the foreign exchange market, there are basically two types of traders: hedgers and speculators. Hedgers are still watching for extreme exchange rate moves to be stopped. Think of major conglomerates like Exxon and how they are trying to reduce their exposure to movements in international currencies.
On the other side, speculators who are finding instability are still looking to take advantage of uncertainty in exchange rates. These involve the major trading desks at large banks and retail traders.