An Introduction To The Forex Market

The Foreign Exchange Market, which is perhaps better known as the Forex, is a global market established for the purchase and sale of currencies. It effectively operates around the clock and daily transactions run into trillions of dollars, which in itself sets it apart from markets such as the US Treasury Bond market which sees daily transactions in the region of three hundred billion dollars and the combined American stock markets at about one hundred billion dollars a day.

The Forex as we know it today was created in 1971 when fixed currency exchanges were abolished and currencies were, and still are, valued at 'floating' rates which are determined by the law of supply and demand. This change, combined with technological advances during the 1980s, created substantial growth in the Forex market so that today it is the world's largest financial market.

The Forex comprises a diverse group of some 5,000 trading institutions including international banks, central government banks, commercial companies and brokers. Unlike most other markets, there is no centralized trading location for the Forex and trading takes place through a number of centers located in cities including New York, London, Paris, Frankfurt, Hong Kong, Singapore and Tokyo, to name just a few, with trading being conducted by telephone and increasingly over the Internet. Principally established to facilitate business trade across international border, today the majority of trading is carried out by currency traders who are looking to profit from small movements in the market.

Thanks to recent changes in the market's regulations small investors can now participate in the market and the previously large transaction sizes have been reduced substantially and many trading restrictions either removed or relaxed. The advent of the Internet has also allowed large interbank units to be broken down into smaller units and standard trading lots of $100,000 are now accessible to the smaller investor who is permitted to trade on leverage of up to 100:1, which means that a $100,000 trade can be controlled with as little as $1,000.

There are many advantages to trading in the Forex including its accessibility, liquidity, the open nature of the market and its commission structure.

Because the market is effectively open 24 hours a day 7 days a weeks and operates largely over the Internet, traders can now work from home and set their own trading hours. And, because the market is so liquid there is never any problem in trading as international banks are always willing to set bid and ask offers and there are always buyers and sellers for any currency. Just as important, currency prices tend to move in response to changes occurring within national economies and, as news of such changes is readily available to everyone trading in currencies, the market does not suffer from the problem of 'insider dealing'.

Perhaps one of the greatest advantages of the Forex lies in the cost of trading. Unlike other markets there are no commissions payable in currency trading and brokers earn their money from the 'spread', or the difference between the buying and selling price of a currency.

But perhaps an even greater advantage lies in the way in which the market operates. Currencies are always traded in pairs with one currency being bought and the other being sold. For example, you may be holding US dollars and sell these in order to buy Japanese yen. Currencies are constantly moving against one another and so, whatever currency you are holding, you will almost always find that there are other currencies moving against your currency to your advantage and offering you the opportunity to profit from that movement. The market also follows well established trends which make it relatively easy to read the future direction of current movements.

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The Forex market is one of the world's safest markets for traders and the entry requirements have now been set low enough for even the small investor to try his hand. With a good training course behind you and a currency exchange calculator at your side Forex trading will prove to be a very enjoyable and lucrative endeavor.