About forex
One of the questions we get asked all
the time is “What is forex trading?” When did it start? How big is it? Who are
the major players? What makes currency rates change?
Here are the answers to all your
questions ?
Forex is the international market for
the free trade of currencies. Traders place orders to buy one currency with
another currency. For example, a trader may want to buy Euros with US dollars,
and will use the forex market to do this.
The forex market is the world's largest
financial market. Over $4 trillion dollars worth of currency are traded each
day. The amount of money traded in a week is bigger than the entire annual GDP
of the United States!
The main currency used for forex trading
is the US dollar.
As the world continued to tear itself
apart in the Second World War, there was an urgent need for financial stability.
International negotiators from 29 countries met in Bretton Woods and agreed to
a new economic system where, amongst other things, exchange rates would be
fixed.
The International Monetary Fund (IMF)
was established under the Bretton Woods agreement, and started to operate in
1949. All exchange rates changes above 1% had to be approved by the IMF, which
had the effect of freezing these rates.
By the late 1960's the fixed exchange
rate system started to break down, due to a number of international political
and economic factors. Finally, in 1971, President Nixon stopped the US dollar
being converted directly to gold, as part of a set of measures designed to stem
the collapse of the US economy. This was known as the Nixon shock, and lead to
floating rate currency markets being established in early 1973. By 1976, all
major currencies had floating exchange rates.
With floating rates, currencies could be
traded freely, and the price changed based on market forces. The modern forex
market was born.
Who trades on the forex market?
There are many different players in the
forex market. Some trade to make profits, others trade to hedge their risks and
others simply need foreign currency to pay for goods and services. The
participants include the following:
- Government
central banks
- Commercial
banks
- Investment
banks
- Brokers
and dealers
- Pension
funds
- Insurance
companies
- International
corporations
- Individuals
When is the forex market open?
Unlike stock exchanges, which have
limited opening hours, the forex market is open 24 hours a day, five days a
week. Banks need to buy and sell currency around the clock, and the forex
market has to be open for them to do this.
What factors influence currency exchange
rates?
As with any market, the forex market is
driven by supply and demand:
- If
buyers exceed sellers, prices go up
- If
sellers outnumber buyers, prices go down
The following factors can influence
exchange rates:
- National
economic performance
- Central
bank policy
- Interest
rates
- Trade
balances – imports and exports
- Political
factors – such as elections and policy changes
- Market
sentiment – expectations and rumours
- Unforeseen
events – terrorism and natural disasters
Despite all these factors, the global
forex market is more stable than stock markets; exchange rates change slowly
and by small amounts.
The forex market has many advantages.
These include the following:
- It's
already the world's largest market and it's still growing quickly
- It
makes extensive use of information technology – making it available to
everyone
- Traders
can profit from both strong and weak economies
- Trader
can place very short-term orders – which are prohibited in some other
markets
- The
market is not regulated
- Brokerage
commissions are very low or non-existent
- The
market is open 24 hours a day during weekdays