Forex is the most liquid and biggest financial market in the world which is used to exchange and trade currencies by large fiscal institutions, businesses, governments, banks, currency speculators, other institutions and individuals. Forex generates a daily turnover that is in excess of $3 trillion and is mainly used to advance global trade and investment. Forex involves the simultaneous selling of one currency and the buying of another and primarily functions to expedite international trade.
You can consider currencies as commodities that are sold and bought on Forex. Consequently, when you purchase the currency of a particular country, then you are, in fact, investing your money in the economy of that country. When that country posts improving economic data, then the value of its currency will raise in relation to others. Under such circumstances, you will then record a profit.
You must also understand that you are really making two trades when you select a currency pair. For example, if you bought the AUD/USD, then you would be buying the AUD while selling the USD. By performing such an action, you must appreciate that you have entered into a commercial relationship with two currencies. This is important for you to acknowledge in order for you to grasp the full implications of the correlations and relationships of both two currencies.
Forex operates 24 hours a day from Sunday 5:00pm EST to Friday 4:00pm EST and is the world’s most traded market. Each trading day, Forex commences in Sydney and then circulates around the world passing through Tokyo, London and New York. During this time, you have the opportunity to trade changes in currency movements. You could view Forex as a huge melting pot because no other institution reacts to the current international events more than it does. In addition, Forex exists because of the constant need to trade foreign currencies against each other, hedge risk, and make international trade possible.
As currencies move against each other in Forex in real time, you can profit from these changes by correctly predicting which ones will increase in value against others. To do so, you must first purchase your chosen currency and then sell it later after it appreciates in value against the other currency. You must be aware that the time required for your profit to be achieved could range from a very short period to a very long one.
The majority of Forex trades involve the biggest and most liquid currencies which are termed the ‘Majors’ and include US Dollar (USD), Japanese Yen (Yen), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD). More than 85% of all Forex currency transactions are centered on these major currency pairs, i.e. EUR/USD, USD/YEN, GBP/USD, USD/CHF, AUD/USD, and USD/CAD.
All Forex transactions are performed on the Interbank Market or OTC (over the counter) via phone or electronic networks because it does not utilize a centralized exchange. Basically, the Forex turnover is generated by two main trading sources. The Foreign trade is produced by organizations buying and selling their products in foreign countries as well as converting foreign sales into domestic currency but represents only five percent of the total turnover.
This trading group includes Governments, companies (exporters and importers) and some investors who have foreign exchange exposure. Their profits can be strongly influenced by the oscillating movements between their domestic currencies and the foreign currencies of their overseas investment or business partners.
The other ninety-five percentage of the Forex turnover is generated by the Speculation trade which entails transactions made for pure profit. This group, which includes funds, corporations and banks, creates artificial rate exposure in order to profit from the price movements of currency pairs. Consequently, you may be surprised to discover that the majority of Forex trading is purely speculative. Only a small percentage of this market’s activity is the result of the fundamental currency conversion needs of governments and companies.