Trading The Foreign Exchange Market

Forex is the largest and most liquid market in the world trading approximately $2 trillion daily. The Foreign exchange market is a cash interbank/interdealer market. In other words, this means the currencies traded in the Foreign exchange market are traded directly between banks, foreign currency dealers and Forex investors. Carefully research the Forex dealers before you sign up with their company.

The Forex market is not a traditional "marketplace" due to the fact that there is no centralized location for Foreign exchange trading activity and, therefore, trades placed in the Forex market are considered over-the-counter (OTC). Forex trading between parties occurs through computer terminals, exchanges and over telephones at thousands of banks worldwide. Clients can trade through online Forex trading platforms and/or over the telephone directly with a Forex broker on their trading desk. Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house.

Until lately the Forex market has not been available to the small trader. The large minimum foreign currency transaction sizes and financial requirements left this market open only to banks, major foreign currency dealers and the occasional large Forex speculator. Now, with the option to leverage large positions with a relatively small amount of money (margin), the Foreign exchange market is now more liquid than ever and available to most traders.

Five major currencies dominate trading in the Foreign exchange markets: the U.S. Dollar, Euro, Japanese Yen, Swiss Franc and British Pound. The currencies are traded in pairs in the Foreign exchange spot market. For instance, buying the EUR/USD in the Foreign exchange spot marketplace just means the purchaser is buying the Euro and selling the U.S. Dollar in hope of the Euro gaining value in relation to the U.S. Dollar. Similarly, the client of a EUR/USD contract would be selling the Euro against the U.S. Dollar.

Over the past twenty years, an escalation in international trade and foreign investment has made the economies of the world more interrelated. New opportunities for traders have been created with the considerable economic growth of the Asian and Latin American economies. Today, supply and demand for a specific currency is the motivating cause in determining exchange rates. Other factors such as intermittently reported economic figures and unexpected news reports, such as disasters or political instabilities, could also change the attractiveness of holding a particular currency, thus determing international supply and demand for that currency.