The foreign exchange (Forex) market attracts millions of investors around the world engaging in foreign exchange trading through brokerage companies (Forex platforms). In Vietnam, the trading of gold and foreign currencies in the Forex market across the borders though not yet allowed has been very exciting. If you are curious to find out what Forex is, this article will help you better understand this form of finance.
What is the definition of Forex?
Forex (also known as FX) stands for Foreign Exchange. It means exchanging foreign currencies. This is the largest financial market in the world aka the pinnacle of capitalism.
According to a statistic in 2006, the amount of money traded per day in Forex reached 1.95 THOUSAND BILLION USD. In 2010, it was 3.98 THOUSAND BILLION USD. We can partly imagine the giant of this market.
Forex is a global decentralized market for the exchange of currencies. The main participants in this market are the major international banks. Financial centers around the world function as anchors of exchange between a range of different types of buyers and sellers around the clock, except on weekends. The foreign exchange market determines the relative value of different currencies.
Up to here, you may have gradually shaped what Forex is. Join us to learn more about it.
When was Forex created?
Business and currency exchange first happened in ancient times. People who exchange money, or help others exchange money, collect a commission. They usually charged a certain fee in their era. In the Talmud (Biblical times) writings, this was clearly recorded.
The modern foreign exchange market began forming during the 1970s. It was after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states after World War II). That was when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
President Nixon was the one who ended the Bretton Woods Accord and the fixed exchange rate. This decision provided a free-floating monetary system.
During 1970-1973, the number of exchanges taking place in the market tripled. Reuters introduced the computer screen in June 1973. It is used instead of telephone and telex used for previous transaction quotes.
What is Forex trading?
Forex trading involves retail traders (like you and me). These are predictions of the price of one currency against another.
For example, If you think the British Pound will appreciate against the US Dollar, you can buy the GBP/USD currency pair low and then (hopefully) sell it at a higher price to make a profit.
Of course, if you buy British Pound against USD (GBP/USD), when the US dollar strengthens, then you will be in a losing position. Therefore, it is important to be aware of the risks associated with forex trading. Do not focus on profits. First, know the fear of losses/risks.
The unique advantages that Forex offers
The foreign exchange market is unique because of the following characteristics:
– Its huge trading volume represents the largest asset class in the world resulting in high liquidity.
– The geographical dispersion.
– Its continuous operation: 24 hours a day, except on weekends. That is, you can trade from 20:15 GMT on Sunday until 22:00 GMT on Friday.
– The variety of factors that affect the exchange rates.
– Margins of profit are relatively low compared to other fixed income markets.
– You can make a profit in both long and short markets.
– There are many powerful but simple to use I.T tools that can help you in trading.
– Use high leverage to increase profit margins and minimize losses to small margin account size.
– You can immediately trade for a very small amount, like $200 with a few clicks.
– You will not be confused with hundreds or thousands of stock codes. Because ou just need to focus on a few main currency pairs and make money out of them.
– Or you can freely trade anywhere and anytime you want. You can enter or exit orders whenever you want. Just a laptop with an internet connection is enough.
Who participates in this market?
Trading companies: a significant part of this market comes from the financial activities of companies seeking forex to pay for goods and services. Trading companies often conduct relatively small transactions compared to banks or speculators. Their transaction usually has a very little short-term impact on the market interest rate.
Central Banks: national central banks play an important role in the foreign exchange market. They try to control the money supply, inflation, or interest rates. Central banks often have official or unofficial target rates for their currencies. They can use their substantial foreign exchange reserves to stabilize the market.
Hedge funds: about 70% to 90% of foreign exchange transactions are speculative. Hedge funds have gained a reputation for positive monetary speculation since 1996.
Investment management companies: investment management companies use the foreign exchange market to facilitate foreign securities transactions.
Individual traders: individual traders also form a growing segment of the market. Currently, they participate indirectly through brokers, platforms, or banks.
What is the rate of Forex currency pairs? How is it determined
Economic factors – economic policies are implemented by government agencies, central banks. Economic conditions are described and adopted by economic reports.
Political conditions – international, national, and regional political conditions and events can have a major impact on the Forex currency market.
Market psychology – The psychology of market participants can affect the forex market in a variety of ways. Economic variables are expressed through transactions based on the crowd sentiment.
Trading algorithms – Trading Forex based on electronic algorithms (or computers/trading robots) is becoming more and more popular. As a result, the algorithm trading results begin to have a great influence on the Forex currency rates.
All of these determinants are reflected in the price action on the price chart. This is why price action is the best trading strategy. By learning to understand and feel it, you can also calculate the probability of all the variables/possibilities that the market can follow, in the simplest and clearest possible way.
In short, Forex trading is an extremely interesting and attractive money-making channel. However, it is risky. You can lose all your money in your account in just a few minutes.
Finally, through this article, we hope to satisfactorily solve the question of what Forex is. This is an article for investors who are wondering.