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An Introduction to Forex
Over the last three decades foreign exchange has become the world’s largest financial market, with more than $2,000 billion traded daily. Forex is part of the bank-to-bank currency market known as the 24-hour interbank market. The interbank market literally follows the sun around the world, moving from major banking centers of the US to Australia, New Zealand to the Far East, to Europe then back to the US.
Until recently, the forex market wasn’t for the average trader or individual speculator, With the large minimum transaction sizes and often-stringent financial requirements, banks, hedge funds, major currency dealers and the occasional high net-worth individual speculator were the principal participants.
These large traders were able to take advantage of the many benefits offered by the forex market vs other markets, including fantastic liquidity and the strong trending nature of the world’s primary currency exchange rates.
Fixed to Floating
Once upon a time, exchange rates were fixed, supported at comfortable or uncomfortable levels by central banks. But as world trade and world tourism burgeoned, so the pressures on fixed exchanges rates became extreme. The only solution was a government-dictated revaluation or devaluation of a currency, usually by several percentage points. Despite these increasingly frequent realignments, trade kept growing and the pressures on inter-currency exchanges rates continued. Eventually, governments realized that allowing currencies to float freely and find their own levels would overcome many of the problems of fixed exchange rates.
A new market is created
With floating currency exchange rates, it was quickly realized that currency trading presented a pure market, and major institutions soon began to trade. Slowly that trading spread down the scale from multinational corporations and international banks – who needed foreign exchange to trade with overseas partners – and produced today’s market, where forex trading is available to the retail investor.
A portfolio extra
Foreign exchange markets represent a viable extra dealing opportunity to those with a classic equities portfolio. With equities, absolute value counts – but with currencies what matters is relative change in value. And value fluctuations can happen quickly – most currency trades last only a few hours before the trader decides the time has come to take a profit or suffer a loss.
Geared to succeed
Trading in currency means buying or selling one currency against another, expecting the exchange rate to move in your favor. Because – except in very exceptional circumstances – currency fluctuations are relatively small, you can gear up to control a large amount of foreign currency on a considerably smaller deposit – gearing of over 100 times is perfectly usual in forex trading. You could therefore control a million dollar trade with a $10,000 stake.
Liquid, time-independent markets
Around the world, there’s $1,500 billion a day of forex trading, making currency the most liquid of all investment markets. And trading takes place 24 hours a day, six days a week. The largest FX markets – and therefore the most liquid and the most commonly quoted – are Euru/Dollar, Dollar/Yen, and Pound/Dollar.
Information provided Ken Kennison of forex specialists square Mile Securities