Forex For Dummies

The foreign exchange market, sometimes referred to as Forex or FX, is an international organization that allows banks and other institutions to easily buy, sell, and trade currencies.

Its purpose is to aid international trade and development by converting one nation’s currency to another, allowing businesses to import goods and pay with their own country’s currency. Since Forex is an over the counter trade market, where brokers deal directly with one another, there is no central exchange or international clearing house on which banks can rely, resulting in minimal cross border regulation and many interconnected marketplaces.

The only thing traded on the Foreign Exchange market is money, the simultaneous process of buying one currency and selling another. Through the help of a broker or dealer, currencies are traded in pairs. Since nothing physical is being traded, the Forex market can be confusing for beginners, but think of it this way. Every time you buy a country’s currency, say the U.S. dollar, you are essentially buying a share in the United States economy. The exchange rate of one country’s currency is based upon the state of its economy compared to the rest of the world, with the healthiest, most profitable economies earning the highest trade value.

The foreign exchange market of today is unique for a variety of reasons, mainly its trading volumes, extreme liquidity of the market, long trading hours (24 hours a day), and low profit margins.

As the largest and most liquid financial market in the world, traders range from small banks, large financial institutions, currency speculators, and governments. The average daily turnover for the forex market is close to 3.2 trillion USD in April of 2007, and has continued to expand since then. Trading in London last year amounted to 1.36 trillion USD, or 34.1% of daily trades in the entire market share, nearly doubling the trades made in New York (16.6%) and Tokyo (6.0%).

There is no one central spot where trades are made on the Forex market, unlike other trade institutions like the New York Stock Exchange. Forex is considered an Over-the-Counter market mainly because everything in the market is run electronically, 24 hours a day, making trades convenient and accessible for people across the globe.

Until quite recently, only very wealthy institutions could trade on the Forex market. It used to require sums of up to $50 million just to start trading and making money. The market was intended only for major banks and large institutions, but the rise of the Internet and enhanced global communication changed that. Now online Forex trading firms make it possible for small retailers to open trading accounts, regardless of the sum. The only thing you need today to begin making your own Forex trades is a computer, an Internet connection, and a little cash to make trades.