What is forex?



Good day everybody.

Welcome to my new series for friends who are new to forex trading.

At the end of this series, my aim is to help you embark on your journey of forex trading. To foster the right mentality and style.

I call this series, Learn Forex The Right Way Series.

Today with part 1, i am going to touch on what forex is exactly?

Foreign exchange market or forex for short is a global decentralized market for the exchange of currencies. This is unlike stocks whereby trading is done at an exchange.

Forex is a 24 hours / 5 days a week market as trading is ongoing in the various financial centers in the various time zones. While the weekends are not typical trading days, a few centers remain open.

The forex market is a very big market. It was reported that in 2007, the daily turnover of forex trading was in excess of $3 Trillion. London accounts for around one third of the volume, followed by New York and Tokyo.

Forex trading is conducted by all types of participants and for all sorts of reasons. Here are a few examples.

  • On the top tier, we have the inter-bank market where large banks and dealers do trading for their customers and also for speculation purposes
  • Next we have large companies seeking foreign currency exchange for their business purposes. Payment for goods in foreign countries, salary of foreign workers, etc
  • Retail foreign exchange brokers, broker platforms where most of us do our forex trading forms a part of the market. Depending on the type of broker, they either seek out the best rates for their customers ( adding a premium on top of it ) or they seek to hedge against positions that they take against customers ( market makers ).
  • Closer to the bottom level, we have money remittance / exchange activities. People seeking to send money to or exchanging for the currency of a foreign country are conducting foreign exchange too. These are usually done through money remittance or exchange companies.

We can see from above that a significant amount of the activities revolves around a commercial purpose and hence the forex market is indeed driven and affected by global events with potential commercial consequences. An economy performing poorly, threat of war, civil unrest, etc.

Forex trading takes place in the form of currency pairs.

For example, the EUR/USD. This currency pair compares how much US Dollar can one EURO be exchanged for. Therefore if the EUR/USD is at 1.4000, it means 1 EURO can be exchanged for 1.4 USD. Typical lot sizes for forex trading is 100,000. This is the reason why most of us are holding margin leverage accounts. Retail brokers provides us with a leverage to enable us to trade in forex. This inevitability increases the risk too.

There you go. I hope you now have a better understand of the market you are trading on.

>> Next in the Learn Forex The Right Way Series
( Myths and Truths of Forex Trading )

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