What is Forex? What are rates of exchange?

Start your basic Forex education from learning about what global Forex currency market is and who are its main participants. This chapter will cover the following questions: why Forex is not market in a direct meaning of this word, what is the reason of its popularity, what features make Forex different from other financial markets and how to benefit from the rates of exchange.

Forex (Foreign Exchange or FX) is an international currency exchange. Have you ever changed your domestic currency into a foreign one? Let's remember how it works: we buy some foreign currency, which price is suppose to grow in the nearest future. Then, when the price goes up, we change domestic currency back, thus we earn the difference in exchange rates and make this trade according to the best exchange rate found.

The Forex market works in the same way. Although we do not have to wait for months till market exchange rate moves up, today rates change in minutes. As for market access, we need only computer with Metatrader software and an access to the Internet. Download MetaTrader 4 right now to plunge into the process.

Forex is the financial market which was formed in the 1970s in the result of refusal from Bretton Woods system of fixed international currency rates. Rapid communications and computers development allowed banks to trade currencies "directly" in the electronic payment systems, without using special organizations - exchanges. Note:

In July 1944, in the town of Bretton Woods, New Hampshire, USA 44 States conceived the International Monetary Fund (IMF). This international organization oversees the balance of payments of its member countries and exchange rates of their currencies. Those agreements were aimed to establish the system of fixed exchange rates (Fixed exchange rate regime). This system was based on gold. One ounce of gold was equal to 35 U.S. dollars. Currencies of all other IMF member countries were tied to the dollar at a fixed rate. For example, the pound was worth $ 4.80, and the Japanese yen – 360 yen per $ 1.

Though IMF established a system of fixed exchange rates for member countries, still there was an opportunity to correct national currency rate in case of emergency. For example, price of the pound changed twice: in September 1947 it was $ 2.80 and in November 1967 it was $ 2.40. Despite the fact that system worked well in the 50s-60s it began to falter in early 70s and in 1971 was canceled. Since then, systems of floating exchange rates (flexible exchange rate) and regulated rates (regulated exchange rate) started to be in use. As a result, rate of each currency started to be determined by market conditions, but firstly and mainly by level of economic condition of the country. Some currencies rates had dropped down, but some of them had increased. For example, in 1944 the U.S. dollar was equal to 360 Japanese yen and in April 2005 – 107 Japanese yen. In this regard, money became a popular instrument of international investment, like stocks and bonds.

Thus, Forex is not a "market" in its traditional meaning. It does not have a certain center and a certain place to trade. All trading is conducted by global information networks that link different participants all over the world.

Now let's look closer at the Forex market members:

  • Central banks. Performing operations in foreign exchange market, central banks are responsible for foreign exchange reserves. Usually they are in market to regulate a national currency rate, which is called intervention. The system is easy: banks buy a currency to make it stronger and more expensive, and sell to make it weaker and cheaper.
  • Commercial and investment banks engaged in investment in foreign assets, hedge and investment funds, insurance companies and other entities that control attracted funds, are also members of the Forex market, acting with the aim of preservation of funds.
  • Foreign trade companies, exporting or importing goods and services are forced to be regular participants of the Forex market in order to conduct mutual settlements and manage the risks.
  • Other active market participants trade through brokerage companies as well as forex departments of banksso these organizations have the bulk of foreign exchange transactions. In this regard, the Forex market is often called interbank. Often these organizations conduct operations independently by means of either their own or attracted funds with the aim to gain profit.
  • Traders (stock, market, commodity traders etc.) are the individuals, who conduct currency transactions to gain profit in their own. Open a trading account and fund it with the deposit to start making profit the same way.

Now, when we know market structure, let's figure out, why this market has become so popular and attractive for both beginner and professional traders.

1. Forex is the largest financial market in the world. Its average daily turnover is more than 3 trillion U.S. dollars and continues to grow.

3. Currency market has the lowest cost, because traditionally it operates without fees, except the market difference between purchase and sale cost (as in any exchange office).

4. Forex is the most verifiable market, because if participants want to affect the market and reach their purposes, they must have considerable sums (tens of billions of dollars).

5. Today, it is very comfortable to work in the Forex market. Everyone can easily get basic knowledge, because comfortable environment has been created for learning process. Moreover, to join Forex you need only a computer with access to the Internet. Create your Forex account now.

6. Forex works around the clock all week, except weekends and holidays. Trading during a week does not stop even for a minute. Worlds financial centers open and close in Asia, Europe, USA and Australia successively. Traditionally there are 4 trading sessions: Asian, European, American and Pacific.

So, it took us quite a bit of time to get a general idea of the Forex market. Let's try to understand this unusual product through trading on the Forex market

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