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
Some of the participants in this market are simply
seeking to exchange a foreign currency for their own, like multinational
corporations which must pay wages and other expenses in different
nations than they sell products in. However, a large part of the market
is made up of currency traders, who speculate on movements in exchange
rates, much like others would speculate on movements of stock prices.
Currency traders try to take advantage of even small fluctuations in
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 anticipations on global
macroeconomic conditions. Significant news is released publicly so, at
least in theory, everyone in the world receives the same news at the
Currencies are traded against one another. 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 into which the price of one unit of
XXX currency is expressed. For instance, EUR/USD is the price of the
euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
stocks and futures exchange, foreign exchange is indeed an interbank,
over-the-counter (OTC) market which means there is no single universal
exchange for specific currency pair. The foreign exchange market
operates 24 hours per day throughout the week between individuals with
Forex brokers, brokers with banks, and banks with banks. If the European
session is ended the Asian session or US session will start, so all
world currencies can be continually in trade. Traders can react to news
when it breaks, rather than waiting for the market to open, as is the
case with most other markets.
Average daily international foreign exchange trading volume was $4.0 trillion in April 2010 according to the BIS triennial report.
any market there is a bid/offer spread (difference between buying price
and selling price). On major currency crosses, the difference between
the price at which a market maker will sell ("ask", or "offer") to a
wholesale customer and the price at which the same market-maker will buy
("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 EUR/USD might be 1.4238/1.4239.
course, does not apply to retail customers. Most individual currency
speculators will trade using a broker which will typically have a spread
marked up to say 3-20 pips (so in our example 1.4237/1.4239 or
1.423/1.425). The broker will give their clients often huge amounts of
margin, thereby facilitating clients spending more money on the bid/ask
spread. The brokers are not regulated by 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 do 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's 24 hours long trading day.
If you want to know more about how to start trading in Forex, please, proceed to our Forex for dummies article.
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