Forex is not only known as currency exchange but it also known as currency market or the currency trading market. The foreign exchange market is actually a worldwide centralized or over-the-counter exchange for the trading of foreign currencies. This market constitutes all aspects of purchasing, trading and selling currencies in current or predicted values. All this happens on a daily basis and involves millions of traders from across the world. It is a 24 hour market and even during weekends.
Forex is basically an agreement or contract between two parties. In forex, one currency is exchanged for another in the same way that cash is exchanged for money. The other party will be the one who pays for the currency being traded. This is how foreign exchange works. However, it is also possible to trade forex with no middle man. There are many brokers who are intermediaries who make trades for their clients but the actual transactions happen between you and the trader whom you choose.
Forex trading is usually done through a broker who is an expert in the particular field that he is dealing with. He is also well-versed with the different factors that affect the value of a particular currency pair. Forex brokers make the trades for their clients on their behalf. The trader makes an initial deposit into his account and after gaining interest from a client, allows the broker to start trading. The broker buys one currency pair, buys it at a price higher than the going rate and sells it at a price lower than the going rate in the same market.
Foreign currencies are generally bought and sold based on their current economic performance or what is known as the spot price. Spot prices are usually derived from data provided by economic institutions in countries where currencies are exchanged. These economic institutions include the central banks of the countries concerned, as well as agencies that collect and compile data on the various economic performances of different countries. The economic performance of a country is closely observed, and it is the main factor that determines the exchange rate between two currencies.
The factors that influence the currency trading include changes in interest rates, the trade deficit, inflation, unemployment and political stability. Interest rates are primarily controlled by the central banks of countries. Changes in the interest rates are translated into changes in forex market prices, and traders then take this as a signal to buy or sell. Inflation is closely monitored by central banks of countries concerned.
Importers and exporters of goods generally set the interest rates in the market. In the case of the national banks, the setting of interest rates is usually done by government officials. The role of central banks in the currency trading market is more the market participants' role. These market participants consist of commercial banks, investment banks, treasury departments, central government, non-governmental organizations, central government, foreign monetary institutions, central Banks, and foreign direct investment funds.
Forex markets have a lot of competitors. Some of these are the futures markets, foreign exchange markets, and stock markets. Other competitors include treasury markets and foreign direct investment funds. In order for a trader to gain profit, he must compare the movements of all these currencies and choose the one that gives him the best profit margin. In forex trading, the profit margin is expressed as the difference between selling price and buying price.
The Forex market may go on for several days, even up to a month, as indicated by the time frame being chosen. Usually, a particular currency can be traded for only a few days if the corresponding foreign exchange market does not have enough trading volume. For example, a particular currency could be bought and sold quickly during its first two days of existence in the foreign exchange market, but if it were traded with the futures market, more time would be required before its purchase and sale becomes possible.