Trading in the Foreign Exchange Market

central_bank_nigeria foreign exchange market

Foreign exchange market is also called the forex market, Currency market, Spot FX or simply FX. This is the market where trading of currencies take place. Participants in the market buy and sell currencies, exchange currencies, or just speculate.

The Forex market is the biggest market of finance in the world. The forex market is composed of investment management firms, banks, hedge funds, commercial companies, retail brokers, forex investors and central banks as its participants. In the forex market, amounts of money continue to increase as investors increase in number, making possible the market’s incredibly rapid growth. Trillions of dollars a day is traded in the forex market.

The foreign exchange market is totally unique because of

• it has a massive trade capacity representing the biggest asset class in the globe directed to very high liquidity;
• it has wide geographical spread;
• it has continuous operations: twenty four hours per day but not weekends, i.e. trades from 8.15 GMT Sunday till 10pm on Friday;
• the diverse variety of things that completely effect exchange rates;
• the extremely low levels of profit as opposed to other fixed income markets
• the continued use of leveraging to capitalize on profit & loss limits with reference to size of accounts.

Therefore, it’s known as the market closest to the supreme of competitive perfection, not with-standing intervention of currency from central banks.

Compared to other markets, the foreign exchange market possesses the highest liquidity. Furthermore, the currency trading is done over-the-counter, and that means there’s no set central marketplace for currency trading and exchange. The market lets traders choose from quite a lot of dealers to trade with and compare prices. The forex market is open for twenty four hours a day between Sundays at 20:15 GMT to Fridays at 22.00 GMT.

Trading in the foreign exchange market involves buying and selling of currencies. One currency is bought while another one is sold and these two processes are done simultaneously. The cost of one currency is established depending on its comparison with another currency. To further explain, this means that in currency trading, two currencies are always involved, and they are called a currency pair. The first of the currency pair is named the “base currency” and the other one is named the “counter currency”. It is shown in the currency pair the how much of the value of the counter currency costs a unit of the base currency. The base currency is the one that is bought while selling the counter currency.

The foreign exchange market has started long ago. It was in 1970’s when the U.S. was taken off the gold standard by the U.S. President Nixon. It was at that time when the currencies of the world began to fluctuate. The U.S. government is now the one who backs the currency instead of gold. The market was opened to public retail in 1990’s. Most of the market participants started to become established in the currency market by the year 2000. In the past, only the banks and large institutions, considered the “big boys”, can participate in the forex market, throwing around ten to fifty millions of dollars everyday as they play in the forex market. But with the beginning of the computer and internet age, the forex market retail is now open to public who are permitted to trade amounts, small or large, that they can handle.

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