FOREX is a worldwide market for buying and selling currencies. Forex is short for foreign exchange, so when you mention "forex market", you are referring to the foreign exchange market. It handles really large volumes of transactions 24 hours a day, 5 days a week. Daily transactions are worth trillions of U.S. dollars
Some time in 1971, fixed currency exchanges were eliminated in favor of of floating rates as determined by supply and demand. To cite an example, USD1.00 may have had an exchange rate of 5 Hong Kong dollars back in the fixed exchange days and that would never change regardless of economic conditions. But in a floating market, USD1 may be HK$5.25 in one minute and then it becomes HK$5.35 ten minutes later or even $5.90 the following day. All these fluctuations in the exchange rate are dictated by economic factors, mainly through supply and demand.
Forex Traders
Forex traders are represented by thousands of trading institutions such as international banks, central banks of different countries and commercial brokers for all types of foreign currencies. Obviously, these institutions are scattered all over the world so there is really no central exchange that controls foreign exchange trading.
Trading was done by phone orders almost exclusively at one time and they still are today but not as extensively. Advances in technology and the presence of the internet have allowed private traders to transact in the comfort of their own homes or offices.
Forex trading is open to all types of investors--big or small. Previously, there was a minimum transaction size and traders were required to meet strict financial requirements. However the rules were relaxed in order to attract the smaller investors especially those who trade from home through the internet.
How Does Forex Trading Work?
Every transaction involves selling one currency and buying another. This is called "trading in pairs", for example: the US dollar against the Japanese yen, or the English pound against the yen, and so on. What happens is if an investor believes (through researching economic trends or through some big financial event) that the US dollar will gain against the yen, that investor he will sell yen and buy dollars.
There are huge profit potentials because there is always movement between currencies. Even small movements can result in substantial profits because of the large amounts of money involved in each transaction. While there is also huge potential for loss, safeguards have been built in to protect both the broker and the investor.
The examples above form the basis for forex trading. While it may seem simple enough, trading for profit can be far more intricate because of so many economic factors.
What Are The Features of Forex Trading?
One of the most important features of forex trading is its liquidity. This basically means that anytime a trader wishes to buy or sell, there will always be another party that will pick up the transaction. This is due to the size and large volumes of the foreign exchange market and the fact that international banks are continuously providing bid and ask offers for the high number of transactions each day.
Individual traders will also be delighted to know that there are no commissions to be paid to brokers. Forex brokers make their money through a "spread". This is the difference between what price a currency can be bought at and what it can be sold at.
As mentioned above, the advancement of technology has made forex trading available through the web. There are a large number of forex brokers operating online, each with their own software to make trading so much easier for the private investors who trade from their home computers.