Forex Trading Guide for Dummies
Forex stands for “Foreign Exchange”. In a Forex market, traders trade currencies of different countries. Forex trade is very important as trades and businesses with other countries take place through currencies.
Real Life Examples of Forex Use
To understand the importance of Forex in the international market, it’ll be easier to illustrate with an example.
Example #1: Suppose, you live in the USA, whose currency is US $. French cheese are known world over as one of the best cheese. If you as a US citizen want to buy cheese from France, you have to pay them in their currency, which is Euro. As a US citizen, you don’t have Euro. You, as an importer, have to exchange equivalent value of US$ with Euro.
Example #2: Suppose a French national comes to India for travel. If he/she wants to buy an exotic decor from an indigenous Indian shop, he/she can’t buy it by offering US$. The first thing he/she needs to do is exchange equal value of Euro with Indian Rupee at the ongoing exchange rate. Only then the French traveler can buy exotic decor from the Indian shop.
Important Facts
Need of exchanging currency necessitated functioning of the international Forex market. This is a fact that it is the most liquid financial markets of the world. Forex trading in terms of volume and value is multiple times larger than any other market, even the stock market. If the August 2012 report of Bank of International Settlements is taken into account, it can be seen that per day Forex trade of US is over $4.9 trillion. When the average traded value of stocks is considered, it revolves around a mere US$ 2,000 billion.
Is there any Specialty of Foreign Exchange Market?
When it comes to international foreign exchange market, there is no central market place present. Trading of currencies take place electronically Over The Counter (also called OTC trade). The mechanism of trade is like this:
#1 Currency traders are located at different parts of the world (with their own terminals).
#2 They are connected to the Forex market through network of computers and not through any centralized exchange.
#3 One of the specialties of this currency market is that it remains open round the clock for 5 and half days a week.
#4 Two traders trade currencies on the basis of prevailing exchange rate (spot market).
#5 Once the trading day in the US closes, the Hong Kong and Tokyo markets open. In all major financial centers across the world – be it New York, London, Sydney, Paris, Singapore, Hong Kong, Frankfurt, Zurich, or Tokyo – currency trade takes place in almost every time zone.
What is Spot market Forex Trading
Spot Forex trading is the largest market where currencies are bought and sold on the basis of current price of the traded currencies (prevailing at the time of trading). Factors that influence this trade include current economic conditions/performance, interest rates, prevailing local as well as international political situations, future performance perception, and many others. Once a bilateral transaction takes place between two traders on different currencies, a spot deal is reached.
To know more about Forex market trading hours, please visit CMC Markets.
