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What is Forex?

The Forex (foreign exchange) market is the largest financial market in the world, with a daily volume of $5 trillion. It also serves as the primary exchange mechanism for global business and trade.

With such a large daily transaction volume, the Forex market offers a wide variety of trading opportunities for people looking to capitalise on the fluctuations of currency values. Forex traders buy and sell different currencies 24 hours a day, six days a week, and access increased leverage (purchasing power) to speculate on global currency flows and market volatility.

The Foreign Exchange market is commonly referred to as Forex or FX, and it is a worldwide, decentralised, over-the-counter financial market for the trading of currencies.

Worldwide

  • It’s a worldwide market because you are looking at the relative value of one countries currency against another.
  • Global and political events drive these markets, affecting the relative values of a countries currency and changing the value of the currency pairs.

Decentralised

  • Decentralised means there is no centralised exchange, unlike the stock market.
  • Instead, the Financial centres worldwide function as anchors of trading between a wide range of buyers and sellers around the clock, except at weekends.

Over the counter (OTC)

  • Any central governing body doesn’t control the currency market, and no clearing houses guarantee the trade.
  • Brokers and dealers negotiate directly with one another through electronic networks.
  • A market where dealers negotiate prices amongst themselves is called Over The Counter.

Trading forex

For active traders, the Forex market should be no different than other trading products, such as equities, commodities, or fixed-income. Forex offers traders a market to buy or sell a trading product. In this case, it is a specific currency pair. The currency pair may be the Euro versus the US Dollar, the US Dollar versus the Japanese Yen, the British Pound versus the US Dollar, the Euro versus the British Pound, or several other currency combinations.

The different currency combinations represent the value of one currency versus the value of another. A single price represents that relationship. In foreign exchange, the price of a currency pair is the market’s expectation (at that time) of the value of that currency measured against another currency, given the current and expected economic and political situation in the two economies. In equity terms, it is similar to the price of the stock.

How does it compare to other markets?

While the stock markets have a daily volume of billions of dollars, the Forex market has a daily volume of more than $4 trillion. Forex market participants include large banks, hedge funds, other financial institutions, global corporations, and individual traders. Most Forex transactions result from currency conversions related to the day-to-day business of the world. The large daily volume of the Forex market provides endless trade opportunities and
the ability for traders to diversify into global currency markets.

What factors come into play when deciding how to trade Forex? How does that compare with trading equities? Let’s say, for example, that an economy,s inflation rate or interest rates are low and stable, its output is growing strongly, and its politics are stable. One can expect that country’s currency to remain strong versus a less fundamentally favourable currency.

Now, let’s compare that with the equity of a particular company. Suppose the domestic and global economy is strong. In that case, inflation is not rampant, competition is not taking away market share, product demand is stable, and workers are productive. You can expect that company’s stock to remain strong versus a company with less favourable fundamentals.

Similar to equities, other factors determine the short-term value of a Forex currency pair, including technical analysis, short-term supply and demand, seasonal capital flow patterns, the instrument’s current price, etc. These universal dynamics will move a currency’s value up or down. Open a live ThinkMarkets account to start trading Forex today.