Forex
Forex commonly referred to as �FX’ or Foreign exchange is
the exchange of one currency for another at an agreed price on the OTC (over
the counter) market. It is the world’s largest market with a turnover of over
$5.2 trillion every day.
It is also a world decentralized marketplace where values of
different currencies are determined. Unlike other markets, there is no a centralized
exchange or depository where different transactions are made. Instead
everything is done by several market participants in multiple locations. It is
very rare to find that 2 different currencies are identical in value and it is
also almost impossible that any 2 currencies will maintain the same value for a
long time. In �FX’ the exchange rates between 2 different currencies change
constantly.
Typically, forex trading is the endeavor of synchronously
purchasing one currency while selling another one, mainly due to speculation. Currency
values fall and appreciate against each other because of a number of factors
including geopolitics and economics. The main goal of most forex traders is to
gain profit from these buying and selling in the value of one currency against another
one by speculating on how the forex processes are likely to be in future.
It works in the same way as stock trading. A trader here
will only buy a particular stock if they speculate that its value is likely to
rise in future. Likewise, forex traders will only buy a particular currency if
he or she expects its exchange rate to rise in future and sell a currency if
they expect its value to fall in future.
Leverage
Foreign exchange is a margined or leveraged product. This essentially
means that a trader is only required to deposit a small percentage of the value
of his or her position to place their forex trade. In essence this means that
their potential for gaining or loosing from their original capital outlay is
considerably higher than in other forms of trading.
Pricing
All forex is usually quoted in relation to another currency.
Every currency pair has a counter and base currency. The counter currency is
always on the left while the base currency is usually on the right.
What affects forex prices?
Forex prices are affected by a number of different factors,
from investment flows to international trade to political or economic
conditions. This is what makes this type of trading so exciting and interesting.
When there is high market liquidity, it means prices can easily change dramatically
in response to short term events and news, creating a number of opportunities for
forex retail traders. Some main factors that affect currency values are:
-Economic and Political stability
-Monetary Policy
-Currency intervention
-Natural disasters