INTRODUCTION
FOREX, an acronym for Foreign Exchange, is the largest
financial market in the world. With an estimated
$1.5 trillion in currencies traded daily, FOREX
provides income to millions of traders and large
banks worldwide. The market is so large in volume
that it would take the New York Stock Exchange,
with a daily average of under $20 billion, almost
three months to reach the amount traded in one day
on the Foreign Exchange Market.
FOREX, unlike other financial markets, is not tied
to an actual stock exchange. Currencies are traded
directly through networks of banks and brokers via
an electronic network or the telephone. The Foreign
Exchange Market is, therefore, also referred to
as an "Interbank" or "Over the Counter
(OTC)" market.
PURPOSE
The foreign exchange market is the mechanism by
which currencies are valued relative to one another,
and exchanged. An individual or institution buys
one currency and sells another in a simultaneous
transaction. Currency trading always occurs in
pairs where one currency is sold for another and
is represented in the following notation: EUR/USD
or CHF/YEN. The exchange rate is determined through
the interaction of market forces dealing with
supply and demand.
Traders generate profits, or losses, by speculating
whether a currency will rise or fall in value
in comaprison to another currency. A trader would
buy the currency which is anticipated to gain
in value, or sell the currency which is anticipated
to lose value against another currency. Reactive
trading is the buying or selling of currencies
in response to economic or political events, while
speculative trading is based on a trader anticipating
events. The value of a currency, in the simplest
explanation, is a reflection of the condition
of that country's economy with respect to other
major economies.
The Forex market does not rely on any one particular
economy. Whether or not an economy is flourishing
or falling into a recession, a trader can earn
money by either buying or selling the currency.
|
