What is the Forex Market?

[Chloe Fonda]

The Forex market, established in 1971, was created when floating
exchange rates started to materialize. It relates to the foreign
exchange market, where brokerage firms and banks are linked over an
electronic network that allows them to exchange the currencies of
countries around the globe. The Forex market is not centralized, like
in currency, futures or stock markets. Trading occurs over computers
and phones at thousands of locations globally.
The Foreign Exchange market, usually referred as forex, is where
banks, capitalists and speculators exchange one currency to another.
The largest foreign exchange activity retains the spot exchange among
five major currencies: US Dollar, British Pound, Japanese Yen,
Eurodollar and the Swiss Franc. It is also the biggest financial
market in the world. In comparison, the US stock market may trade $10
billion in one day, whereas the Forex market will trade up to $2
trillion in one single day. The Forex market is an opened 24 hours a
day market where the primary market for currencies is the 24-hour
Interbank market. This market follows the sun around the world, moving
from the major banking centers of the United States to Australia and
New Zealand to the Far East, to Europe and ultimately back to the
Unites States.
There are three main causes to participate in the Forex market. One is
to facilitate an actual transaction, whereby international
corporations convert profits made in foreign currencies into their
domestic currency. Corporate treasurers have their own forex trading
strategies so they also get into the Forex market in order to hedge
against undesirable exposure to future price movements in the currency
market. The third and more popular reason is speculation for profit.
In fact, today it is estimated that less than 5% of all trading on the
Forex market is actually helping a true commercial transaction.
Forex trading system views forex market as an Over the Counter (OTC)
or 'Interbank' market, due to the fact that transactions are carried
on between two counterparts over the telephone or via an electronic
network. Trading is not centralized on an exchange, as with the stock
and futures markets. In this big forex trading system forex trading
starts each day in Sydney, and moves around the globe as the business
day begins in each financial center, first to Tokyo, London, and New
York. Unlike any other financial market, investors can react to
currency fluctuations caused by economic, social and political
consequences at the time they occur - day or night.
So far, professional traders from major international commercial and
investment banks have ruled the Forex market. Other market
participants range from large multinational corporations, global money
managers, registered dealers, international money brokers, and futures
and options traders, to private speculators. The Forex market is
called an 'Interbank' market due to the fact that historically it has
been dominated by banks, including central banks, commercial banks,
and investment banks. However, the percentage of other market
participants is rapidly growing, and now includes big multinational
corporations, global money managers, registered dealers, international
money brokers, futures and options traders, and private speculators.
Forex trading system is the biggest financial market in the world,
with a daily average turnover of approximately US$1.2 trillion. The
world's currencies are on a floating exchange rate and are always
traded in pairs, for example Euro/Dollar or Dollar/Yen. Approximately
80% of all Forex trades close seven days or less and more than 40%
last fewer than two days. As a universal rule, a position is kept open
until one of the following occurs: realization of enough profits from
a position, the specified stop-loss is triggered, another position
that has a better potential appears and you require these funds.

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