The term Forex has been widely used by many today, with almost everyone coming across it at some point in time. Traded by an increasing number of institutions as well as individuals, the Forex trade has become a worldwide name, yet, if you are among those who haven’t heard or know nothing about the Forex market then this is for you.
Forex: Meaning and History
Forex also called Fx or currency market is an acronym for ‘The Foreign exchange market’. Money exchange has been in existence for as long as money has existed. The modern-day Forex market began in the 1850s when Alex. Brown & sons began trading currencies. Primarily traded in Pound Sterling it evolved to accommodate more currencies. After WWII, currency exchange became very prominent and the first legal law was signed giving flexibility to trading. Forex was briefly closed from 1972 to 1973 after which Forex has thrived.
Forex is a decentralized global market where currency trading occurs. Regarded as the largest financial market in the world, Forex has a market filled with the big, middle and small players. The big players include large firms such as commercial banks, major financial organizations, national banks as well as major insurance firms. They are typically the highest buyers and sellers in the market, making them major determinants of the market flow.
The middle players are next, made up of smaller financial firms, like the micro-finance banks and investment companies. These investment companies act as brokers to their clients who do not know how to trade. They are useful in the trading world and have made their mark, making a profit and reducing risks for both themselves and their clients. The last is the small players, they include individuals and local bureaux de change. They make small marks to the market individually but collectively they have created a place for themselves in the market, making a profit, although in small amounts.
Trading is carried out using currency pairs. In the forex market, trade is achieved by comparing two currencies and making a sale or purchase in both. The most popular trade pair is the EUR/USD but there are many more such as USD/JPY of GBP/USD. Here the first currency is regarded as the base currency, most times being USD, AUD, NZD, GBP, and EUR and is traded in relation to the price of the counter currency. The counter or quote currency is the second currency in the pair and is usually of a smaller international recognition than the base currency.
Trading in the Forex market is done 24/5, with trading closed on weekends. Trading has become very widely done, most countries have legalized Forex placing very little to no rules in trading.
Forex trade around the world
Forex has a high liquidity rate, making it a risky business where many have gained a lot and lost, even more, when trading, even with the risk many still take up the market daily. London so far has been known as the hub of Forex trade, with it accounting for over 40% of the trade, The United States as well as India and South Korea are also major players in the trade market.
In Africa, there is a large market of South African Forex trader, with the South African Forex leading the continent.
Determinants to the Forex Market
The currency market is an ever-fluctuating market and the littlest of things can cause it to flow in a completely different direction.
Factors ranging from
- National economic changes, national policies, budget, inflation, and productivity.
- Political conditions, instability in government and power change.
- Traders choices, long or short term buys and movement in investment choices.
- International politics, policies, and assets.
All these are factors that can cause a change in the market.
Terms of trading
Here are some terms to keep in mind when trading in the forex market.
- Long position refers to a buyer who has bought an investment and keeps while speculating on when it will be best to sell.
- Short position refers to a buyer who has bought an investment and sells it off with the hope of a decline in its value.
- Ask price refers to the amount a trader is willing to sell his investment.
- Spot refers to a two-day transaction which involves cash rather than a contract.
- Forward refers to a delay in payment for a future date with the same agreed price paid at the future date no matter the present price state, this reduces the risk of foreign exchange.
- Swap refers to an exchange of currencies with the decision to exchange those currencies back at a decided time
- Futures refers to an agreement usually in contract form to the exchange an agreed currency volume at a decided date.
Whatever your choices are you can be certain that Forex trade can be a very profitable choice as well as a risky venture. So get your facts straight no matter what market you are trading from and consult as many professionals as you can before joining the Forex Trade.