What is Forex?

9 May 2019

FOREX 101:
What is Forex Trading?

by User Name343 27

FOREX, or the foreign exchange market, refers to the act of trading currencies between countries. Currency trading is essential because it affects foreign trade and business globally. Since many different currencies are used around the world, there is a huge need for currency exchange.

The need to exchange currencies in a global economy is why the foreign exchange market is the largest liquid financial market in the world. It has an average traded value of around $5 trillion per day.

Since there is no central marketplace for this international market, all foreign exchange market transactions take place electronically through computer networks between traders around the world. The market is open 24-hours a day, five days a week and spans almost every time zone. Currencies are traded worldwide among major financial centers such as London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. As the trading day ends in New York, a new trading day begins in Tokyo, which means the forex market can be extremely active at any time of day or night.

There are three ways that institutions, corporations and individuals can trade on the FOREX market. The Spot Market is where currencies are bought and sold at the current price, which is determined by supply and demand. A “spot deal” occurs when a bilateral transaction takes place. One party delivers a certain amount to the counterparty and receives a specified amount of another currency at the exchange rate. These trades typically take two days to settle. The spot market is the largest and most-popular FOREX trading market, used mainly by individuals.

The Forwards Market does not trade in actual currencies. Instead, it trades in contracts that include claims to a certain currency type, a specific price per unit and a future date for settlement. In the Forwards Market, contracts are bought and sold electronically between two parties, who determine the agreement terms amongst themselves. In the Futures Market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets. These contracts have specific details that cannot be customized. Corporations and institutions are most likely to trade in these markets.

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