Forex, also referred to as forex trading constitutes a broad network of sellers and buyers, who transfer foreign currencies among them at a price agreed upon. It is regarded as the largest financial trading market in the world with a turnover of 5 trillion dollars. Since traders are always purchasing one currency and selling another, the currencies are traded in pairs. Also, when it comes to trading currencies, traders can trade more than 80 pairs including major, exotics and cross pairs.
The forex market thus serves as a means for companies, individuals as well as central banks to convert one foreign currency into the other. While, much of forex trading is carried out for practical purpose, the majority of it is done with the objective of earning profits. Given that a number of currencies are converted each day, movements of prices can get extremely volatile. It is this volatility that brings about a huge chance of making profits, while also resulting in a number of loss making opportunities.
How does the Currency Market Operate?
Unlike commodities or shares, foreign exchange trading isn’t carried out on exchanges, but between 2 different parties directly in the OTC market. The forex trading market is operated by a network of global banks, spanning across 4 different trading centres in varied time zones including New York, London, Tokyo and Sydney. Since there is no centralized location, traders can trade foreign exchange currencies 24 hours every day. It is important for traders to note that there are 3 distinct types of foreign exchange markets including spot forex, forward forex and future forex markets.
Also, there are numerous ways in which traders can trade foreign exchange viz. by simultaneously purchasing one forex currency while selling the other. Traditionally, forex transactions are carried out via forex broker, but with an increase in online trading, one can benefit from movements in using derivatives such as CFD trading.