Foreign Exchange Basics: The Forex Market

Here we will look at the Forex market and foreign exchange basics. There are various issues to explore in the foreign exchange market. You will need to understand how it works when you plan to take sensible steps towards being a successful Forex trader.

You will come across several different terms for the forex market. Forex and fx are both short ways of saying ‘foreign exchange’. It may also be called the currency market, the foreign currency market, the currency trading market, etc. All of these terms refer to the same international market on which the currencies of the world are exchanged and traded.

The forex market is not situated in one particular place. Practically every country is involved so there is a possibility of trading currencies in most countries. Because of this, the market runs 24 hours a day, five days a week. The week starts on Monday morning in Sydney, Australia (that is, 5 pm Sunday EST in the USA) and ends at 4 pm EST on Friday in New York. During that time it is always possible to trade currencies somewhere in the world.

Surprisingly, the Forex market is a new phenomenon. Until the 1970?s, world currencies seemed stable in comparison with one another since WWII. In relation to the US dollar, every currency had a value that was called the ‘gold standard’. In order to maintain a stable economy, this system was introduced.

However, in the early 70s the USA abandoned the gold standard and the values of the different currencies began to change. Banks immediately began to exchange currencies for profit, buying low and selling high, instead of only making exchanges when they needed to transfer money from one country to another. In effect, each currency became a tradeable commodity. This was the beginning of forex trading.

Remember that the value of a currency is influenced by the nation to which it belongs. This means that the currency of a nation increases in value when that nation is prosperous. As a direct result, if a nation is facing a national crisis, the value of their currency decreases, such fluctuations can be very fast and very large. Most often, there are very large sums of money involved. Nearly $2 trillion dollars a day is the average to the total values of transactions on the Forex market.

Large financial institutions, such as major corporations, international and investment banks as well as others are involved with these exchanges. It is possible, however to trade as a private individual while using a broker. Another popular media of trading is online using the internet. Today there are multitudes of individuals who involve themselves in Forex trading via their home computers. However, they only account for about 2% of the total Forex market, since their trades are in smaller sums than those of other institutions.

The most common exchanges involve the US dollar against other currencies (especially the euro, British pound, Japanese yen, Swiss franc and Australian dollar) but it is possible to trade any one currency against another. Many of the automated forex robots used by individual traders concentrate on lesser pairs such as the pound against the euro.

The foreign exchange market is huge and an individual trader can feel like a tiny ant dodging around the feet of elephants. But anyone can get into it if they have a little capital that they are willing to risk. Some brokers will let you start with as little as $250. Before investing any real money, however, it is best to practice with a forex demo account while you learn the foreign exchange basics.