FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
Some of the participants in this market are simply trying to pay a foreign currency for its own exchange, as multinational corporations, wages and other expenses in different nations than they sell products must, however, a large part of the market,made up of currency traders who speculate on movements in exchange rates, as others would speculate on movements in share prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market, there is little or no "inside information". Exchange rate fluctuations are usually caused by actual monetary flows as well as expectations of global macroeconomic conditions. Significant news is released public as, at least in theory, everyone gets the same time in the world the same message.
Currencies are traded against each other. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX / YYY, where YYY is the ISO 4217 international three-letter code of the currency in which the price of one unit of XXX currency. For example, EUR / USD, the price of the euro in U.S. dollar terms, as in 1 euro = 1.2045 U.S. dollars.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market, there is no single universal exchange for specific currency pair means. The Forex market is open 24 hours a day during the week between individuals with forex brokers, brokers with banks and banks with banks. If the European session is ended the Asian session or U.S. session start, so that all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting until the market opened, as in most other markets.
Average daily international foreign exchange trading was $ 4.0 trillion in April 2010 according to the BIS triennial report.
Like any market there is a bid-ask spread (difference between purchase price and sale price). On major currency pairs, the difference between the price at which a market does not sell Maker ("Ask" or "Offer") to a wholesale customer and the price to buy which the same market maker ("the bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR / USD price of 1.4238 a pip would be the '8 'at the end. So the bid / ask quote of the EUR / USD might be 1.4238/1.4239.
This is not of course apply to end users. Most individual currency speculators will trade through a broker who say typically a spread marked up to 20:03 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The brokers give their clients often huge amounts of margin, and thus facilitate customers more money for the bid / ask spread. The brokers are not of the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They are not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid / ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market for 24 hours of trading.
To learn more about how to start trading in Forex, please go to our know Forex for Dummies article.
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