What Is Forex Market?
Also known as FX, forex means exchange of different currencies in a decentralized global market. It has the world's largest transaction volume and liquidity. Forex covers simultaneous trading of global currencies in that market.
Forex is one of the world's most traded markets with a daily transaction volume of $5.5 trillion. Forex market is not based on a central location or stock exchange. It is open 24 hours a day from Sunday midnight to Friday midnight. Traders, companies and global organizations continuously trade in different currencies to avoid fluctuations in foreign exchange rates.
Even if forex means foreign currency exchange, many commodities including gold, oil, copper, coffee and wheat, as well as indices and cryptocurrencies are also traded in the forex market.
An Overview of Forex Markets
Currencies are traded in forex markets. Currencies are important as a means of buying goods and services locally and globally. International currencies have to be converted for international trade. For instance, if you live in Turkey and want to buy cheese from France, you or the company you buy the cheese from should pay the French in Euro (EUR). This requires the importer in Turkey to convert their Turkish Lira (TRY) to Euro at an exchange rate. Same applies to travel. A French tourist in Egypt cannot pay in Euro to visit the pyramids since it is not the local currency. Therefore, they have to convert Euro into the local currency.
Why Forex Market Is Unique
A unique aspect of this international market is that there is not a central market for foreign exchange. Instead, foreign exchange takes place electronically in over-the-counter (OTC) transactions. Over-the-counter means that all transactions are performed by traders around the world through computer networks rather than in a centralized exchange.
Is Forex Market Always Active?
The market is on 24 hours a day, five and a half days a week. Currencies are traded in major financial hubs such as London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney, covering all time zones. This means that when a trading day ends in the United States, it starts in Tokyo and Hong Kong. Therefore, the forex market may be extremely active at any time of the day as prices keep changing.
A Brief History of Forex
In its simplest sense, forex market has been around for centuries. People have always exchanged goods and currencies to trade goods and services. Nevertheless, the current form of the forex market is a relatively new invention. The Bretton Woods agreement in 1971 allowed more currencies to fluctuate freely against each other. (Bretton Woods Agreement is an "International Monetary Agreement" signed in a United Nations money and finance conference held in Bretton Woods, a small town in New Hampshire, United States, in July 1944.) Currency values depend on demand and circulation, and are monitored by currency trading services. Most of the trading activity in forex markets are carried out by commercial and investment banks on behalf of their clients. However, there are also speculative opportunities for professional and individual traders to exchange currencies. As an asset class, currencies have two characteristics.
1. You can earn the interest rate difference between two different currencies.
2. You can make money on trading foreign currencies.