What is Forex?

The foreign exchange market (also known as FX trading or Forex) is a global interbank decentralised market, where traders conduct foreign exchange transactions.

The modern Forex market was formed and developed in the 1970s when the International Monetary Fund (IMF) abolished the Bretton Wood exchange system and adopted a new free-floating exchange rate policy. As a result, global currencies were no longer linked to gold; currencies started to be used to buy currencies, and exchange rates were floated and driven by market forces.

Average daily turnover is more than 3 trillion dollars and is continuously growing, thus the Forex exchange market is regarded as one of the most liquid and largest trading platforms because of a number of currencies available to trade, traders and tools. Apart from other financial markets like Chicago Board of Trade, the London Stock Exchange, Bursa Malaysia or Bolsa de Madrid the foreign exchange market isn't located at any particular headquarters and has no central marketplace. Trading in Forex is carried out electronically over-the-counter (OTC) from different interconnected marketplaces, which means that all transactions are carried out via computer networks among traders from around the world. The FX trading continues 24 hours, from late Sunday until the end of Friday. Traders sell and buy worldwide in the major financial centres of New York, Paris, Frankfurt, Zurich, Hong Kong, Tokyo, Singapore, Sydney and London - across almost every time zone. This means that when traders exit the market in the USA, traders enter it in Hong Kong and Tokyo. This enables the Forex exchange market to be extremely active at any time of the day, with price quotes changing constantly. Moreover, the huge daily output of the Forex trading makes it possible for buyers and sellers to freely open and close the positions whenever they want to trade without any delay.

The price fluctuations in the Forex exchange market are not similar to stock and bonds markets, where relatively large gaps are likely to be observed. These fluctuations depend on actual monetary flows in addition to forecasts. They give rise to variations in gross domestic product (GDP) growth, retail rates, inflation, unemployment, foreign direct investment (FDI), interest rates and other macroeconomic factors. Major news is published openly, and often on fixed dates. Therefore, many people across the world can simultaneously access the same news. On the other side, the large banks have a significant advantage - they can observe their clients’ order flow.

In simple terms, foreign exchange trading consists of the buying of one currency and the selling of another at the very same time. The widely known rule "buy low - sell high" is the source of Forex trades' income. The characteristic feature of trading in Forex is that almost all trades are of a speculative nature and are not concerned with any physical delivery of currency.

Currencies on the Forex exchange market are traded in pairs, one against another. Each currency pair is a trading unit and is usually marked as AAABBB or AAA/BBB, where AAA and BBB are the ISO 4217 international three-letter codes of the traded currencies. The first currency (AAA) is used as the base or primary currency and is quoted to the second currency (BBB). For example, the quotation GBPJPY (GBP/JPY) 122.1053 is the price of the British pound expressed in Japanese Yen, meaning that 1 pound = 122.1053 yen.

Most exchange rates are quoted against the US dollar, when the USD is the primary currency (e.g. USDMXN, USDINR). But there are other major currencies: euro, British pound,Japanese yen, Canadian dollar, Australian dollar,  and the Swiss franc. Trading usually involves four major pairs - EUR/USD (the two largest currencies), USD/JPY (a popular pair for newcomers), GBP/USD (the most liquid pair), and USD/CHF (an easy pair to trade due to the safety of the Swiss franc).

Not long ago, FX trading was unavailable for retail traders because of an extremely high minimum amount of transactions and strict fiscal requirements. The only traders operating on currency markets were banks, hedge funds, corporations and the largest currency dealers. With final access to this trading, they dealt with primary exchange rates of the currencies. The Forex market was extremely liquid, along with exceptionally stable trends.

Today, retail traders can also sell and buy the small lots (units), because the large interbank units are divided by market makers at the amount they prefer. Retail traders can work with intermediaries carrying out transactions on their behalf. These professionals are called brokers.

Traders of any size, as well as small commercial companies and individual investors have access to trading at the same fluctuations of currencies and exchange rates, which until recently only big Forex players were able to use. Considering the difference of rates, FX trading market makers keep track of them and sell and buy currencies when it is profitable.

The Forex market can be compared to a dangerous jungle in which you can encounter lots of predators and risky areas. However, at the same time, trading currencies is the only available but hypothetical way of making $1,000,000 out of $1,000 initial deposit within one week of foreign exchange trading. Unfortunately, this is only a supposable result because many greenhorn traders handle their transactions as gambling, which surely does them no good and results in them losing their entire $1,000. Foreign exchange trading is sure to turn rewarding and lucrative, as long as you learn the basic systems and techniques and spend a lot of your time on demo trading.

According to the latest set of financial statistics, approximately 93% of investors lose their money at Forex. With this in mind, it is obvious that you have an opportunity to gain money and a chance of becoming one of many Forex players to amass a large fortune. You should however remember all of the risks which are involved in trading in Forex. Your main tools are your knowledge, skills, caution and a small initial investment.