The foreign exchange market (aka FX-Market or Forex Market) is an international market in which one country’s currency is exchanged for the currency of another at the prevailing exchange rate. The exchange rate, also referred to as “cross rate” is usually determined by natural market forces like demand and supply, but can be moved by intervention of central banks as well.
Unlike futures markets, the foreign Exchange market is a spot market where trades are settled “on the spot” (usually within 2 days). This 24-hour market gives traders the opportunity to trade a live market online at anytime.
Currency trades take place in pairs (e.g. EUR/USD), where traders go long the first currency and short the second. The smallest value/unit a currency pair trades for is known as a “Pip”.
Currency quotes are determined by the BID and ASK price in the inter-bank market. The difference between the BID and ASK price is measured in "Pips" and referred to as the "Spread". The more liquid trading in one currency pair is, the narrower the spread becomes.
Currency traders make use of “leverage” when trading foreign exchange, which is the use of borrowed money based on a smaller amount of deposit. Leverage is what makes a trade very risky and by the same token, highly rewarding.
The foreign exchange market is critical to the functioning of international trade and finance. Currency trades take place in the “interbank”, or over-the-counter (OTC) cash markets, which essentially is a network of private and governmental banks that was established in 1971. Daily foreign exchange trading volume totals trillions of US-Dollars (US$4 Trillion per day were topped in 2012), which makes the foreign exchange market the most liquid of all markets! 85% of Forex trades take place in 4 major currency pairs. Multinational companies, governments, importers, exporters, hedgers and speculators are some of the participants of the foreign exchange markets.
95% of daily Forex trading volumes comes from speculators, who are seeking to make a profit from the rise or fall of a currency. On the other hand, currency hedgers like importers and exporters as well as multinational companies implement trading strategies aimed at limiting currency fluctuations. Such hedge trades ideally limit currency fluctuations, which in turn afford price and cost stability. The remaining 5% of the total daily trading volume in currencies is executed by governments and big corporations for the same reasons.
Simulated Forex Trading
If you are new to Foreign Exchange (Forex, FX) trading, Broker Junction recommends to sign up for a Free - 14 day simulated Demo Trading Account prior to funding your real account with Broker Junction or any other broker.
There are substantial risks involved in foreign exchange trading, which may or may not be entirely revealed to you depending on your simulated trading experience/performance. To learn more about this subject and the risks involved, please be advised to review the following guides: