Forex Trading: What is it?
Forex is a word that you may have heard, but you don’t know what it means. Forex stands for “foreign exchange” and foreign exchange trading is how people can exchange one currency for another one.
Currency trading is critical to the way that business is conducted around the world. For example, an American businesswoman who imports chocolates from Belgium would need to exchange her U.S. dollars for Belgian currency, which in this case is the euro. That dollars for euro exchange would enable the American buyer to receive goods from her European supplier. What this comes down to is having a locally accepted currency pay for whatever you buy. That makes sense – you wouldn’t take Japanese yen at your store in Tennessee. How would you know what it is worth and where would you trade it in for cash?
More than two trillion dollars of funds is exchanged globally worldwide. That amount exceeds what people pour into the stock market each day. Unlike the stock market, which has central exchanges in New York and elsewhere, global currencies are traded over the counter or OTC. No central exchange takes place which means that trades are conducted online between traders located all over the world.
Those trades are conducted by service providers or private companies that manage these trades with agents. Unlike the stock market, trades can be conducted around the clock seven days a week. However, like most jobs, people who are involved in forex trading do like to take some time off and may not be available to you on weekends, on their holidays and during certain times of the day. For example, if you like to conduct trading after 4 p.m. on weekdays and you’re exchanging dollars and yen, the Japanese stock market is still several hours away from opening. Some traders may be active, but most will keep normal hours and work when their local markets are open. The Baby Pips website offers a very good example of the days when currency trades are most active.
By now, you may have figured out that people can make money by trading currency. There are “spot markets” and “forward markets” and “futures markets” where trading takes place. In spot markets currencies are bought and sold according to the current price or value. Prices are determined by supply and demand, and are based on such factors as local political and economic conditions, and the current interest rates. Once a deal has been nailed down then a “spot deal” has been made. When the exchange price or position is determined, then settlement is made in cash.
With both forwards and futures markets, no currencies are traded. Instead, these markets deal in contracts that stand for claims made for a particular currency type — a precise price per unit and a future date for settlement. In forwards markets contracts are bought and sold over the counter between two parties. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the New York Mercantile Exchange according to Investopedia. The National Futures Association regulates the futures market in the U.S.
In our next article we’ll take a look at how people make money via Forex or FX trading.