What is Forex Trading?



Forex Trading is a worldwide trading of currencies over the Foreign Exchange Market, known as Forex, Fx or Currency Market.

Interestingly, a broad spectrum of different forex buyers and sellers around the world trade different currencies over worldwide financial centers. The Currency Market determines the correlating values of different currencies.

The main objective of Forex is to ensure international business transactions taking place via currency conversions from one currency to another. For example, the Currency Market permits a US business to import British goods and pay Pound Sterling, even though the business's primary income is in US dollars.

It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.

An example of Forex Transaction is when a person purchases a quantity of one currency by paying a quantity of another currency. Did you know that the modern foreign exchange market began forming during the 1970s?

It was formed when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

Interesting, isn't it?

Forex Trading is unique because of

  1. Its huge trading volume, leading to high liquidity;

  2. Its geographical dispersion;

  3. Its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;

  4. The variety of factors that affect exchange rates;

  5. The low margins of relative profit compared with other markets of fixed income; and

  6. The use of leverage to enhance profit margins with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding market manipulation by central banks.

As of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007, according to the Bank for International Settlements.

The $3.98 trillion could be broken down as follows:
  • Spot transactions took up $1.490 trillion

  • Outright forwards $475 billion

  • Foreign exchange swaps $1.765 trillion

  • Currency swaps $43 billion

  • Options and other products $207 billion
Forex trading is different from any other financial trading market in that it is open 24 hours a day. Of course this is only true in the business week, but from Monday morning (or Sunday evening in many time zones) through Friday afternoon it is open non-stop and you can trade at any time.

This is because the forex trading does not operate in any one fixed place. It involves all of the world's currencies and trading is possible during business hours in all time zones. This covers the whole 24 hours.

However, if you are actively involved in forex trading you will want to know more than this. You will need to know what are the best times to trade since the market is not equally active 24 hours a day. You might also want to know the precise times of the opening and closing at the beginning and end of the week, and the different session times in the biggest financial centers.

You may know that the international dateline runs down the Pacific Ocean, with Asia and Australasia on one side and the American continent on the other. New Zealand is one of the first countries to begin the new day, with eastern Australia following.

So when the financial center in Sydney opens for business at 8 am on Monday morning, it is 5 pm Sunday in New York and 2 pm Sunday in California. There can be some variations because of different time settings in summer, but broadly speaking this means that if you live in the western states of the USA you can start your trading week right after Sunday lunch.

At the end of the week, the last major market to close in the forex world is New York at 4 pm EST Friday. The financial floor in Chicago will stay open later, as will some of the South American countries, but currency trading for the week pretty much die down right around the New York close. Now that is going to be a lot later in places further east. It's 9 pm in London and if you live in Sydney, you can trade right through to 7 am Saturday, eastern Australian time.

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