The Basics of Forex
Investors, governments, businesses, banks and traders use the Forex market to speculate on and exchange currencies. This is the biggest and most liquid market on the globe with a $3.98 trillion turnover every day. The market is open five days each week with the most important trading centers in New York, London, Frankfurt, Zurich, Singapore, Hong Kong, Sydney and Paris. Unlike stocks there is no central marketplace for Forex. The major banks quote the prices and there are variations. Currency pairs are purchased from brokers and not other traders.
The History of the Forex Market
The implementation of the gold exchange standard occured in 1876. This was meant to stabilize the world currencies because all paper currency was required to be backed by gold. The theory was good but this standard was dropped when World War II began. Fixed exchange rates were then implemented by the world and the primary reserve currency become the U.S. dollar. This was referred to as the Bretton Woods System since the this was the only currency still backed by gold. The system ended in 1971 when the United States stopped exchanging U.S. dollars for gold. This led to the world accepting the rates for floating foreign exchange and the market for foreign currency. This market did not become popular until the 1990’s.
Forex trading is speculating on the value of one currency versus another. Traders decide which currency they believe will rise against the United States dollar and purchase these currencies in pairs. The idea is to buy low then sell at a higher price. If a trader bets on the Euro and the U.S dollar is stronger they will not make a profit and money will be lost. It is important to understand the rewards and the risks and to count on a professional broker such as crypto77. Traders learn to take advantage of the volatility and high leverage of the Forex market. This is accomplished with an effective strategy and trading plan combined with discipline.
Numerous banks trade billions of dollars every day and enable speculative trading and commercial transactions. Some of these trades are for customers while others are proprietary traders. Companies purchase and sell services and goods to foreign countries through the foreign exchange market. One of the most important aspects of the Forex market are companies making transactions in foreign countries by exchanging currency. Governments use their central banks to decrease or increase their currency’s value, control inflation, the money supply, interest rates and often attempt to stabilize the market. Seventy to ninety percent of foreign exchange transactions are executed by speculating on the market. Billions of dollars are controlled by the big hedge funds. Anyone who has ever traveled to a foreign country and exchanged their currency at a bank or airport has played a role in the foreign currency exchange market. Investment firms use the Forex market to manage portfolios for their clients.
Retail Forex Traders
This market is constantly growing with internet accessibility and trading platforms. Retail Forex traders use banks or brokers to access the market. There are two basic types of Forex brokers. These are the dealers and the brokers. The brokers are agents and try to locate the best pricing in the market and execute deals for their clients. In addition to the market price they charge their customers a commission. The dealers are often referred to as market makers. They quote prices, act as a counter party and receive their compensations from the spread. This is the purchasing and selling price. The Forex market offers excellent trading opportunities but beginners must understand the rewards and the risks.