Forex: how the foreign exchange market works
Forex is the world’s largest foreign exchange market by volume of trade and income. Trillions of dollars are circulating here daily. Based on the definition of Forex (foreign exchange) in English, this is the exchange of foreign currency. And in this currency trading involves the central and commercial banks of the world, transnational corporations, large investment companies, funds, private investors and traders.
In simple words, the essence of forex trading is speculating on the price differences of currency pairs. There is an opportunity to make money on the growth of currencies as well as on their fall. Profit can be much higher than bank deposits and investments into traditional stock exchange instruments and reach dozens of percents a year, providing there is a balanced and well-thought-out approach to trading. It is worth to take into account that trading is a high-risk activity.
Historical background
Forex Market emerged in the 70s of the last century. Rejection of Bretton Woods system in favor of Jamaican one in 1976 has become the reason of its creation.
Currency rates were set by the market, not by the state, as it had been before. The main practical significance of the new system was the transition from fixed exchange rates, which were based on the gold content of currencies, to floating ones. As a result, quotations were changing every second. This situation contributed to the normal functioning of the global economy. A full-fledged capital exchange between the states became possible.
In Russia Forex became widely accessible later, in the 90’s. At present more than 25 thousand people trade in the Russian jurisdiction.
How the forex market is set up
It is important to understand that Forex is not an exchange, but an over-the-counter market, it has no centralized floor for trading (so it is incorrect to use the expression “playing at the exchange Forex”). It works 24 hours a day, 5 days a week, on weekends and holidays trading stops. Practically non-stop trading is possible due to the division into four trading sessions:
- Asian, with financial centers in Tokyo, Hong Kong and Singapore;
- Europe with centers in Frankfurt, Zurich, Paris, London;
- the Americas, with centers in New York and Chicago;
- Pacific, with centers in Sydney and Wellington.
When one session ends, another begins, so traders have access to trading around the clock. Most currencies are more actively traded in the sessions to which their country belongs. For example, EUR/USD is most actively traded in the European and American sessions.
Trading at Forex market is based on the principles of margin trading, i.e. trading with use of the so-called leverage. Trader’s own money, which he has invested in trading, is taken by the broker as a pledge for the period of open transaction.
Before proceeding to real trading in the Forex market, a trader can practice on a demo account. You will also need a demo account later to test trading strategies, robots and advisors.
Modern trading terminals such as MetaTrader 5 are used for work, where various types of charts and orders are available. Since the software has versions for desktops, mobile devices and browsers, the trader is not only tied to the time of day, but also to the workplace. The platform is provided free of charge.