Covering The Basics Of The Forex Market

Covering the basics of the Forex market

The foreign exchange, or Forex, market is relatively young, having begun in the early
1970s after the United States dropped the gold standard and national currencies started to
fluctuate widely. For about 30 years prior to that, most nations had agreed to keep their
currency values stable in relation to the U.S. dollar, making a Forex market unnecessary.
With that no longer the case, banks quickly realized that a profit could be made in
"buying" currency when it was devalued and "selling" it after it strengthened, just like
any other commodity.

Today, the Forex market handles about $1.9 trillion in transactions every day, and it runs
24 hours a day, five days a week. (With nations around the world involved, it's always
daytime somewhere.) The most traded currencies are the U.S. dollar, the euro, Japanese
yen, British pound, Swiss franc and Australian dollar.

The Forex market is overwhelmingly dominated by international banks, government
banks, investment banks, corporations, and hedge funds. In fact, individual traders
account for only about 2 percent of the market. Nonetheless, a lot of people do try their
hand at it, with varying degrees of success.

In the Forex market, transactions are always handled in pairs: You buy one currency and
sell another one. The idea is to make a trade when you believe the currency you're
buying is going to go up in value compared to the one you're selling. Then, if it turns out
your prediction was correct, you do another trade in the reverse direction -- selling the
currency you originally bought and buying the one you sold -- in order to reap the profits.

For example, let's say the market reports this: GBP/EUR 1.2200. That means the cost of
buying one British pound is 1.22 euros. If you believed that course was going to change,
and the euro was going to become more valuable than the pound, you might sell 100,000
pounds, buy 100,000 euros, and wait. Then let's say a few weeks later, the exchange rate
fluctuates to this: EUR/GBP 1.3100. Sure enough, the euro is now worth 1.31 pounds, a
profit of 0.11 per unit.

The Forex market is vast and daunting and mostly inhabited by giant organizations. But it
can be navigated by individuals who have studied the finer points and who want to take a
risk on something potential profitable. And since the whole world uses money, the
trading of that money is always going to be a major force in the financial world.