By Paolo Palazzi-Xirinachs
What is Forex trading? The foreign exchange (also known as currency, forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade volume in the global forex and related markets currently is estimated at over US$3 trillion. The Foreign Exchange Market is a 24/7 market place.
But why does this market exist? For example, it permits a UK business to import European goods and pay in euros, even though the business’s income is in British pounds. It also supports speculation, and facilitates investors borrowing low-yielding currencies and investing high-yielding currencies.
Currencies exist on free-floating exchange rates, and are traded as pairs in relation to each other. The most traded pairs in the world are called the Majors. They are EUR/USD (Euro/Dollar), GBP/USD (Pound/Dollar), USD/JPY (Dollar/Yen) and EUR/GBP (Euro/Pound). Additionally, there are three minor pairs known as Commodity Pairs, because their economies and currency are heavily influenced by their natural resources. They are USD/CAD (Dollar/Loonie), AUD/USD (Dollar/Aussie) and NZD/USD (Kiwi/Dollar). About 85 percent of all regular FX transactions involve the exchanging of the world’s key currencies: US Dollar (USD), British Pound (GBP), Euro (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), Australian Dollar (AUD), and Swiss Franc (CHF)-but currency exchanges occur amongst all the currencies of the world.
Four key currency exchange pairs are generally utilized for investment purposes. They are: Euro in opposition to US dollar, US dollar in opposition to Japanese yen, British pound in opposition to US dollar, and US dollar in opposition to Swiss franc.
Transactions within the foreign exchange marketplace are performed by dealers at key banks or at currency trading brokerage firms. Currency trading occurs 24/7 and is a vital cog of the worldwide marketplace, so while you are sleeping in the comfort of your bed, the dealers in Europe may be exchanging currencies with their Japanese or Australian counterparts.
With the advent of Internet technology and availability, FOREX trading has dramatically grown in popularity and is now available to investors of all types. As with any other financial product exchange, the successful trader must not only be knowledgeable and savvy with regard to the currencies being traded but also the venue in which he or she is operating.
About the Author
For more information visit www.igmarkets.com/fx/.
