The foreign exchange market (Forex) is the largest global market for trading currencies. Its daily turnover totals $3-4 billion. This figure greatly exceeds the daily volume of the stock market and futures market together. The forex market came into being in the late XX century. That time, all influential states reached a decision to abandon the policy of fixed exchange rates in favor of floating ones.
Each and every deal on the global currency market is carried out through various financial institutions. The list consists of dealing firms, brokerage companies, pension funds, insurance companies, central and commercial banks. Besides, exchange operations can be conducted via transnational corporations. The main instrument to trade on Forex is a national currency of different countries. The U.S. dollar accounts for the majority of trades. Advanced global economies interact with each other. Therefore, exchange rates of their national currencies frequently swing from side to side. So, market participants gain profits from the fluctuations of the exchange rates.
Forex has no definite physical venue which makes a striking difference between the foreign exchange market and an exchange floor. So, a trader is capable to make deals from home or an office. The essential things for a trader are a computer and access to the Internet. Forex market participants can work any time day and night as the forex market operates 24 hours a day 5 days a week.
Besides, Forex is special because currency exchange rates are not set in stone. They fluctuate in a certain rhythm. That is why the forex market is safe from crashes. Appreciation of one currency inevitably pushes another currency to lose in value. It proves the market is always changing. Thanks to the opportunity to trade online, Forex is available to absolutely anyone who is keen to try one’s hand at trading. One more advantage, you do not have to save a lot of money to make first steps on the market. Just $1 is enough as a start-up capital!
The main feature of the foreign currency market is its resilience. Nevertheless, participants should be on alert. So, they have to be careful about a stock index tumble or a market decline. Importantly, the forex market cannot crash instantly as compared to the stock market. Indeed, if securities are worthless, it is a complete failure. If, for example, the U.S. dollar has lost in value, a currency of another country will inevitably gain ground. Let’s consider a situation. During a certain period, let’s say three months, the Japanese yen rocketed 25% against the U.S. dollar in December 1998. The greenback slumped by dozens percent at some trading sessions. However, depreciation of the American currency or another currency did not cause a crash on Forex. Trading was going on in the routine mode. Thus, it indicates stability of both forex market and forex business as a currency is the most reliable and liquid trading instrument.
Traders are mainly attracted to popular or, in other words, highly liquid currencies which are termed as majors on Forex. Nowadays, 85% of all trades are carried out with most frequently used currencies. So, the most liquid currencies are considered to be the U.S. dollar (USD), the Japanese yen (JPY), the single European currency (EUR), the pound sterling (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), and the Australian dollar (AUD).
Trading on Forex, one should know how financial instruments are designated. The principle is quite simple. Currencies are always traded in pairs. All currency pairs consist of two symbols which can be divided by a slash. The value of a currency is determined by its comparison to another currency. For instance, the price of the EUR/USD pair shows how many dollars you should spend to buy 1 euro. Likewise, GBP/USD (the pound sterling against the U.S. dollar), USD/JPY (the U.S. dollar against the Japanese yen). The slash (/) is often omitted in symbols of currency pairs. So, the financial instruments look like this: EURUSD, GBPUSD, or USDJPY.
It does not make sense to deny that trading on Forex can generate profits as benefits are obvious. Market participants can make profits thanks to fluctuations of currency prices. The financial market comprises a large number of prices of currency pairs. The price of a currency pair means the ratio of currency prices making up the pair. For example, the information that 1 euro is trading at 1 U.S. dollar 34 cents means that the EUR/USD pair is trading at 1.3400.