Forex is a blending of two words foreign currency and exchange. Foreigh exchange is the process of changing a currency type into another for various reasons such as trading, tourism, and commerce. The following information will help anyone who is into forex trading.
The foreign exchange market is a global market where national currency exchanges take place. Forex markets are the largest and also the most liquid asset markets worldwide. Currencies trade with each other as exchange rate pairs. EUR/USD is the currency pair used for trading the Euro against the US dollar. There are many ways the forex market exists such as spot cash markets, offering forwards, options, futures, currency swaps, and derivatives markets.
What is the forex market?
This is the place where the currencies are traded for forex trading. Currencies are significant since they allow people to purchase goods and services locally and even abroad. International currencies have to be exchanged for foreign trade and business.
It works this way. A French tourist who is in Egypt can’t pay in euros to see the pyramids since this currency is not what is locally accepted. This necessitates the French tourist to exchange his euros to the local currency, which is the Egyptian pound, at its current exchange rate.
What makes this market unique?
One unique aspect of this international market is the lack of a central marketplace to be used for foreign exchange. Currency trading is done online over the counter (OTC). This means that all transactions happen through a computer network composed of traders all over the world instead of just a centralized exchange.
How Forex Started
The forex market we know today is a modern invention. This was caused by the collapse of the Bretton Woods accord in 1971, when all the currencies were allowed to float against each other. The values of individual currencies differ according to demand and its circulation. These are also monitored by foreign exchange trading services.
Most of the trading in forex markets are conducted by commercial and investment banks on behalf of their clientele. However, you may also find speculative opportunities for various professional and individual forex investors for trading a currency against another.
Currency trading was once difficult for individual investors before the advent of the internet. During this time, most of the currency traders were hedge funds, multinational corporations, high net worth individuals (HNWIs). Forex trading required a large amount of capital. Due to the advent of the internet, a new retail market emerged aimed at individual traders.