Additional Resources

  1. Department Of Economics [personal.psu.edu]
  2. Foreign Exchange Reserves [webfeeds.brookings.edu]
  3. 3. The Foreign Exchange Market [colorado.edu]
  4. Principles Of Macroeconomics: Section 13 Main [colorado.edu]
  5. Currency Crisis In Thailand: The Leading Indicators [iwu.edu]
  6. Phd Graduates [utdallas.edu]

Definition

The foreign exchange market is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of volume of trading, it is by far the largest market in the world. The main participants in this market are the larger international banks. Financial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market does not determine the relative values of different currencies, but sets the current market price of the value of one currency as demanded against another.

Forex

Forex is the abbreviation for Foreign exchange. The Forex market is the place where currencies from all over the world are traded. The Forex market is also called the currency trade market and FX market. It is the largest and highly-liquid market worldwide. On average, currency trading reaches a value up to trillions of US dollars every day.

The Forex market allows participants from across the globe to buy, exchange, and sell currencies. Unlike other markets, the Foreign exchange market has no central depository or marketplace. Instead, all trading takes place over the counter through a widespread network of international brokers and dealers. Also, participants can trade currencies anytime they want. The currency trade market is accessible 24 hours and 5 days a week.

Major Financial Centers for Forex Trading

Some of the leading centers for Forex trading include:

  • London
  • New York
  • Tokyo
  • Frankfurt
  • Hong Kong
  • Zurich
  • Paris
  • Sydney
  • And Singapore

How Forex Traders/Speculators Operate?

To increase gains from Forex trading, speculators tend to buy currencies that they think will rise in value and simultaneously, sell currencies that they believe will reduce in value. This allows them to keep growing their currency portfolio and profits.

Factors that Impact the Exchange Rate

The most common factors that may impact the value of currency exchange rate are:

  • The country's monetary policy
  • Political stability
  • Interest rates
  • Imports and exports

Therefore, it is very rare that the currencies of two countries will be similar or identical in value. The value of the currency keeps on fluctuating depending on the supply and demand. For example, an increase in the supply of currency of a country and decrease in its demand can drop its value. Similarly, a decrease in the supply of a country's currency and increase in its demand can cause the value to rise.

A major benefit of trading Forex is that participants can buy and sell currency pairs at any time and that there is no 'bear market' in Forex. Participants can make and lose money in the Forex market regardless of whether it is trending upwards or downwards. To improve gains through Forex trading, it's important to have a good understanding of the economic condition of the currencies you wish to trade in, so that you can make informed decisions at the right time.

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