what is forex: What is Forex Trading

What is Forex Trading

Forex is an international financial market where free trading of currencies takes place. A short form for foreign exchange, Forex trading typically deals in the sale and purchase of currencies or the exchange of two currencies in a currency pair. It is the world’s biggest financial market and mostly trades in US dollars.

In 2010, BIS triennial report stated that the average daily trading volume in the international foreign exchange market amounted to $4.0 trillion. The amount of money traded in the foreign exchange market in a week is greater than the annual GDP of the US.

In order to attain financial stability after World War II, international negotiators of 29 countries had a meeting in Bretton Woods where they all agreed to the creation of a fresh economic system in which there would be fixed exchange rates.

Under the agreement made in Bretton Woods, the establishment of The International Monetary Fund (IMF) took place. IMF began operations in 1949 and had the authority to freeze rates. Exchange rates that altered by more than 1% had to be approved by this institution.

By 1960s, this system of fixed exchange rates started fail as a result of several economic and political factors. Then, President Nixon ordered to stop conversion of the US dollar to gold in 1971, as a measure to prevent the downfall of the economy of the United States. This event, known as the Nixon shock, resulted in the establishment of floating rate currency markets in 1973.

The outcome of this was that by 1976, there were floating exchange rates for all key currencies. Floating rates enable free trading of currencies in the currency market. All price changes in the market occurred as a result of market forces. This was the origin of our present-day Forex market.

Forex market includes many participants who trade for different reasons. Some trade to earn profit, some trade to pay for foreign goods and services and some trade to distribute and evade risks. Some of the key players of the Forex market include:

    Government central banks
    Investment banks
    Commercial banks
    Brokers and dealers
    Insurance companies
    Pension funds
    International corporations

Timings of the Forex Market

The Forex market is open for five days. However, unlike stock markets, they are open 24 hours a day as banks need to trade currency round the clock.
Factors That Can Affect Exchange Rates

The Forex market is largely affected by external factors and market forces that can influence currency exchange rates. Some of the key factors are:

    National economic performance
    Interest rates
    Central bank policy
    Trade balances – exports and imports
    Market sentiment – rumors or expectations
    Political factors – like elections or policy changes
    Unforeseen events – natural disasters or terrorism

Even with all these factors, the global foreign exchange market is quite stable in comparison to the stock market. This is because the exchange rates of currencies change very slowly and by trivial amounts.

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