Forex Markets: A Brief Explanation
I first heard of the term Forex trading three years ago, barely a year since joining university. However, I never endeavored to research about this business venture that some senior students were involved in. Three years down the line, a friend comes and suggests that we give a shot to this supposed goldmine. I have been doing a research on the same and this article highlights a few things you ought to know about Forex trading.
Forex is done for a variety of reasons, among them commerce, trading or tourism. According to the Triennial report of 2019 from the Bank of International settlement (a global bank for national central banks), the daily trading volume for forex reached $6.6 trillion in April 2019. The figure is expected to be higher than that in 2021.
Forex has been around for centuries as people have always exchanged goods and currencies to buy goods and services. However, Forex market in its current connotation is a new invention. Forex Market is the platform where currencies are traded on a daily basis. Currencies are important since they aid the exchange of goods and services locally and internationally. International currencies are mostly exchanged in order to conduct foreign trade and business.
In its modern sense, Forex has been in existence since the accord at the Bretton woods in 1971. Since then more currencies vary based on demand and circulation and they are monitored by forex trading services. Commercial and investment banks conduct most of the trading in the Forex markets on behalf of the clients but there exists some speculative opportunities for trading one currency against another for professional and individual investors.
Before the advent of internet, currency trading was very difficult for individual investors. However, with the advancement in technology and the invention of internet that has changed tremendously and in unprecedented ways. With internet’s helps a retail market aimed at individual and professional traders has emerged, providing easy access to foreign markets, either through the bans themselves or brokers making a secondary market.
An investor is likely to profit from the difference two interest rates in two different currencies by buying the currency with the higher interest rates and shorting the currency with lower interest rates.
Additionally, Forex market is the only continuous nonstop trading market in the world. Forex in the recent years has become more retail-oriented in recent years and traders and investors of many holding sizes have begun participating in it. This market is considered more opaque as compared to other financial markets spread across the blog. Large liquidity pools from institutional firms are a prevalent feature of forex market.
One unique aspect of the international market where forex is done, is that there is no central marketplace for foreign exchange. Currency trading is conducted electronically over the counter (OTC). This means in a nutshell that all the transactions occur in computer networks between traders around the world rather than on one centralized exchange system.
Moreover, the market is open 24 hours a day, five and half days a week. Currencies are traded worldwide in major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Singapore, Hongkong, Sydney and Paris — that is across every time zone. Therefore, this implies that when a trading day in the United States ends, the Forex Market begins anew in Tokyo and Hong Kong. As such the market tends to be extremely active anytime of the day for the five trading days of the week. However, it is important to note that trading currencies is a risky and a complex affair. Owing to the fact that Interbank market has varying degrees of regulations and that forex instruments are not standardized.
