Introduction
Foreign exchange (also known as forex or FX) is a global market for exchanging currency between all major nations and can be seen as one of the most important markets in the world. According to the Bank for International Settlements, average daily turnover in foreign exchange markets reached $7.2 trillion by 2020 – the highest it has ever been. This market involves trading currencies for profit, usually in exchange for a transaction fee.
Foreign exchange is an over-the-counter (OTC) market, meaning transactions take place between individual parties rather than through a central exchange. Trading takes place between two parties: an individual investor, or ‘spot trader’, who conducts transactions directly with another individual; or a broker who acts as an intermediary between buyers and sellers of currencies.
Characteristics of foreign exchange market
The foreign exchange market is unique compared to other markets, both in complexity and opportunity. This is mainly due to its global nature and its nonstop trading hours. Consequently, it is incredibly liquid, and large amounts of currencies can be purchased and sold quickly and with minimal transaction costs.
It is also an attractive market for traders due to its multiple order types, which can include take profit, stop loss and limit orders. Moreover, the foreign exchange market offers currency pairs with wide range of profits and losses which enable traders with different risk preferences to find suitable match for them.
In addition, the foreign exchange market is not a centralized market, meaning the trading activities of different participants are largely independent from each other and can lead to variable prices for currencies. And despite having no central exchange or governing body, the varied regulatory compliance of the different participants still offers some level of customer protection.
Foreign Exchange Trading
Foreign exchange trading is the act of actively expecting changes in the value of currencies and then taking positions – either long (buying a currency when its value is low) or short (selling a currency when its value is high)– in a way that can profit from that change.
Traders assess potential gains to determine whether a currency will appreciate or depreciate against another. This assessment involves two primary techniques: fundamental and technical analysis. The former examines the underlying fundamentals of an economy – like unemployment or interest rates – to determine future movements in its currency; while the latter is a technical system of reading market charts and graphs to explore patterns that suggest why a currency might move either upwards or downwards in the future.
In the foreign exchange market, most investors are institutions, banks and companies. However, more and more individual traders are trading in this market due to the abundance of trading platforms, such as MetaTrader, which allows users to trade with low costs and minimal technical skills.
Conclusion
Foreign exchange is one of the most important markets in the world and is becoming increasingly popular among individual traders. It offers multiple order types, wide ranges of profits and losses, and is largely liquid and independent from a central exchange. Foreign exchange traders assess potential gains primarily by fundamental and technical analysis to determine whether a currency will appreciate or depreciate against another. Therefore, having a good understanding of foreign exchange market, trading strategies and the fundamentals of the economies involved can enable individual traders to generate profits from the foreign exchange market.
