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Introduction to the Foreign Exchange Market

The Foreign exchange market, or simply known as the Forex is a global market where one could buy and sell currencies. Basically it trades 24 hours a day and 5 days in a week. The flow of money coming into Forex is huge. The average daily exchange is estimated to be worth around 1.5 trillion dollars a day.

The US Treasury Bond markets (which averages 300 billion US dollar in transaction a day) and the American Stock Market (which deals to roughly 100 billion US dollar a day) fails in comparison with the volume of transaction that the Forex has.
The Forex market was instituted in 1971 following the abolishment of fixed currency exchange among trading nations. In effect, currency values have fluctuated and valued at “floating” rates which were determined by the law of supply and demand. Since its introduction in the 70’s, Forex trading enjoyed a steady growth. But not until in the 80’s, where the technological marvel which is the internet was introduced, did it grow from 70 billion US dollar a day to the current 1.5 trillion dollars that we see today.

There are about 5000 trading institution that deal in Forex. These are international banks, central banks (among which is the US Federal Reserve), commercial trading companies and brokers that deals with all types of foreign currency. Currently there is no “centralized” dealing station for Forex. Trading is done through major trading centers located in New York, Tokyo, Hong Kong, Singapore, London, Paris, and Frankfurt.

Almost all of the trading is done through telephone or over the internet. So relatively the trading never really stops, it might be ending in Tokyo but is just beginning in New York. Also major businesses use the market to trade goods in other countries. The most activity from Forex comes from the currency traders who use the market to generate profit from small movements in currency prices.

You might think that the Forex market is only for the high roller. Well you are mistaken, most trade nowadays cold be initiated by small time investor, thanks to the relaxation of some regulations. Before, there was a minimum transaction size and traders were faced with strict financial regulations. But all that changed with the advent of internet banking where regulations have been changed to allow large interbank units to be broken down into smaller lots.

A lot is worth about 10000 US dollar and usually accessed by traders through loans or “leverage”. Usually the lots could be controlled with a leverage of 100:1 which means that 1000 US dollar will allow you control of a 100000 US dollar currency exchange.

Currencies should always be traded in pairs, for example the US dollar to the Euro or the UK pound against the UK pounds. Each individual transaction will cause the buying of one currency and the selling of another. Hence, if an investor foresees that the euro will gain against the US dollar, then he will sell dollars and go for the euro. So profit is eventually guaranteed because even small movements could translate to substantial gains due to the volume of money involved.

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  1. I’ve made a pretty penny using these pairs: Euro/US dollar and Yen/US dollar but I learnt that focusing on one pair is best when you are beginning to learn the ropes.

  2. What Grace said about concentrating on a single currency pair is truer than true. Personally I prefer USD/JPY. I found that Forex trading is so much more convenient with the advent of the WWW. Trading can be done no matter where you are, and that’s why I’ve gotten a laptop for this reason.

  3. Pingback: Eric

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