February 28, 2009
Know The Basics Of The Foreign Exchange 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.
The foreign exchange market is known by many names, including the Forex and FX as well as the foreign currency market, the currency trading market, the currency market and various others. They refer to the same international market where individuals and large companies are trading or exchanging different world currencies.
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.
The forex market is a surprisingly recent phenomenon. Up until the 1970s, currencies had been stable relative to one another since the second world war. What was called the ‘gold standard’ gave every currency a value in relation to the US dollar. This system was introduced in order to maintain a stable world economy.
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.
In a sense the value of a currency is the value of that nation who the currency belongs to, therefore, similar to the stock exchange companies, when a nation is successful the value of its currency increase. Consequently, if the nation falls into a crisis the value of its currency drops. These fluctuations are vast and fast. There may be huge sums involved. The average of the total values of transactions today on the Forex market ranges to nearly $2 trillion dollars daily.
These foreign exchanges involve many large financial institutions, such as investment and international banks as well as other types of major corporations. However, many private individuals do trade on the Forex using a broker. Using the internet and online trading are also very popular today. Scores of individuals use their online computer to trade on the Forex. Their trades are often smaller than some other large institutions, these individual traders rank at about 2% of the total Forex market.
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 vast; some individual traders may feel outnumbered by large corporations. However, with a little capital to risk anyone can get in on the market for trading. You may start with as little as $250 when you work with a broker. However, you really should practice with a Forex demo account while you are learning the foreign exchange basics before actually investing any real money.
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