What is Forex?

What is Forex?

What is forex ? Quite simply, it’s the global market that permits the exchange of one currency for another.

If you’ve ever traveled to another country, you typically had to find a currency exchange booth at the airport. And then exchange the money you have in your wallet into the currency of the country you are visiting.

Tourists who travel from one country to another must exchange currencies in order to pay for a local product or service.

A wad of Euros would be totally useless to an Italian tourist wishing to visit the Sphinx in Egypt because it is not the locally accepted currency.

The tourist would have to exchange his Euros for the local currency, Egyptian pounds, at the existing exchange rate that day. 

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade.

The forex market is the major, most liquid market in the world with an average daily trading volume exceeding $5 trillion.

All the world’s collective stock markets don’t even come close to this.

History of Forex

To get the answer of “what is Forex” is necessary to have a look on the history. In 1876, something called the gold exchange standard was implemented.

Basically, it said that all paper currency had to be backed by solid gold.

The idea here was to stabilize world currencies by fastening them to the price of gold.

The gold standard was fell around the beginning of World War 2 as major European countries did not have sufficient gold to funding all the currency they were printing to pay for large military projects.

What is Forex?

Even though the gold standard was ultimately dropped, the precious metal never lost its spot as the ultimate form of monetary value.

The world then decided to have fixed exchange rates that resulted in the U.S. dollar being the primary reserve currency and that it would be the only currency backed by gold, this is known as the ‘Bretton Woods System’ and it happened in 1944.

In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods System.

The Real Start of Forex

It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976.

This was effectively the “birth” of the current foreign currency exchange market, although it did not become widely electronically traded until about the mid1990s.

What is Forex?

What is Forex? explained

Even without knowing much about Forex trading, residents of a country exchange currencies with another country each time they buying a foreign product.

For example, someone living in the U.S. needs to buy a nice bottle of French wine may pay for it in dollars but the wine has already been paid for in Euros.

Somewhere along the line, either the wine producer or the American importer had to have exchanged the equivalent value of U.S. dollars (USD) into Euros. This is all about Forex trading.

Unlike the New York Stock Exchange or other stock markets, there is no central marketplace for foreign exchange.

Rather, currency trading is conducted electronically over-the-counter (OTC).

which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week.

What is Forex?

This foreign exchange market exists to ease investment and trade. The primary trading centers are London, Paris, New York, Tokyo, Zurich, Frankfurt, Sydney, and Singapore.

All levels of traders, from central banks to speculators, trade currencies with one another.

HOW DOES FOREX MARKET WORKS

On the FOREX market one currency is exchanged for another. The single most important thing with respect to FOREX market is the exchange rate between two currencies (a currency pair).

You’ve probably seen it on the news:

CURRENCY PAIR EXCHANGE RATE
EUR/USD 1.4515
GBP/USD 1.6430

An exchange rate can suffer rapid changes, sometimes several times a second, so there’s a lot of action going on 24 hours a day, 5 days a week. In general, the currency exchange rate reflects the health of an economy in comparison to others. If the economies of the Eurozone are doing better than the US economy, the euro will go up compared to the dollar (EUR/USD ↑) and vice-versa.

What is Forex?

World’s Major Currencies

COUNTRYSYMBOLCOUNTRYSYMBOL
United StatesUSDSwitzerlandCHF
EurozoneEURCanadaCAD
JapanJPYAustraliaAUD
Great BritainGBPNew ZealandNZD

Types Of currency Pairs

In each Currency Pair there is a Base Currency and a Secondary one. The prices as well as the charts on a currency pair usually refer to the Base currency.

Example. If you read somewhere that the EUR/USD is getting stronger, it means that the EUR is getting stronger against the USD.

If you look at the EUR/USD chart, it shows an upward trend which means that the EUR is getting stronger over the USD.

There are 3 categories of currency pairs: the Major currencies, the Crosses and the Exotic.

Majors

Majors are the most traded currency pairs in the Market. These pairs are listed below: 

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • USD/CAD
  • AUD/USD
  • NZD/USD

Crosses

The Crosses are the currencies that are traded against each other and do not include the USD.

An example of the cross currency pairs is GBP/JPY and EUR/GBP.

Exotic

Exotic Currencies are the ones that are traded in very low volumes and they lack market depth.

The Mexican Peso and the South African Rand are examples of the Exotic Currencies.

Foreign Exchange Market

Who Trades Forex?

After getting the answer of what is Forex? we are moved on to who trade Forex.

“That’s Great”

The Forex market is traded by a variety of different organisations and individuals. Some of the main players in the Forex market are:

Who are the biggest players in the Forex market?

  • Governments
  • Central Banks
  • Big banks
  • Small banks
  • Small, medium and large businesses looking to hedge their exposure
  • Institutional traders (speculators)
  • Mum and dad traders (speculators)

Forex Market Hours 

 most liquid market in the world

Now that we have set the base timezone as GMT, we move on to understand the available forex market sessions. There are 4 market sessions based on timings and these are the Sydney session, the Tokyo session, the London session and the New York Session.

The markets have been democratic is splitting these sessions across continents with one session each in Australia, Asia, Europe and the Americas.

It begins from the Sydney Session. Have a look on the below chart for in-depth understanding.

RegionOpen and Close Times
Sydney Open10 PM GMT (summer) / 9 PM GMT (winter)
Sydney Close7 AM GMT (summer) / 6 AM GMT (winter)
Tokyo Open11 PM GMT (summer) / 11 PM GMT (winter)
Tokyo Close8 AM GMT (summer) / 8 AM GMT (winter)
London Open7 AM GMT (summer) / 8 AM GMT (winter)
London Close4 PM GMT (summer) / 5 PM GMT (winter)
NY Open12 PM GMT (summer) / 1 PM GMT (winter)
NY Close9 PM GMT (summer) / 10 PM GMT (winter)

Until now we have learned a lot about What is Forex? And also you have understood the different sessions and also understood why it is important to trade during times of high liquidity.

Let’s move on to the next higher level to understand when forex market hours clock opens and closes in a time span of a week.

The market opens for the week at 9 PM or 10 PM GMT and forex market closes for the week at 9 PM/10PM GMT on Friday.

These timing is the most important thing to understnad in the answer of “what is forex”. As Exchange rates matter with session.

Why it is a lucrative Market

Another thing about Forex trading: The necessity to exchange currencies is the main reason why the Forex market is the largest, most liquid financial market in the world.

It outstrips other markets counting the stock market, with an average traded value of more than 5 trillion US$ per day.

Being conscious of the greatness of Forex trading should be enough of an introduction to Forex trading to motivate the eager investor to plunk down his money and start to trade.

Till now the question “what is Forex ” is fully answered if there is still something in your mind you can ask me in comments.

Also Read About: Swing Trading Strategies

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