The Foreign Exchange or Forex (FX) market allows individuals and/or firms to speculate on the exchange rate between two currencies. It may also be utilized for hedging and protection purposes by individuals and/or firms that transact business globally.
The FX market is considered an Over The Counter (OTC) or 'Interbank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange as with the stock and futures markets.
The major players in the market up until now have been only professional traders from major international commercial and investment banks. Today, the market is being utilized by other market participants that range from large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, to private speculators.
The three main reasons for the market are – conversion of foreign profits into domestic currency, hedging against unwanted exposure to future price movements in the currency market and the most popular reason is for speculative profits which accounts for 95% of today’s daily FOREX (FX) volume.
By speculating in the Forex (FX) market, traders buy & sell currencies with the hope of making a profit when the value of the currencies changes in their favor.
Traders utilize both Fundamental (Global News, Economic Data) & Technical (Real Time and Historical Rate Data) analysis in order to assess their bias / position.
Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic indicators including news, government-issued indicators and reports, and even rumor.
The major factors affecting the Forex (FX) market are economic, social and political events that relate to monetary and fiscal policies around the globe (Interest rates, Inflation, Trade Surplus / Deficit, etc.) In addition, traders also assess Central Banks across the globe with regards to intervention policies where governments sometimes participate in the Forex (FX) market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. Any of the aforementioned factors or large market orders might cause volatility.
The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectations surrounding an event that drives the market rather than the event itself.
The Forex (FX) market's volume is estimated at over US $1.8 Trillion daily which makes it the largest and one of the most exhilarating trading markets in the world today – 30 times larger than the volume of US Equities markets.
As in any investment, it is prudent to assess the online forex trading brokers prior to opening an account. Below you will find the regulating bodies that oversee the industry:
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