Foreign exchange is a currency trading platform for global investors. When enterprises engage in imports and exports, currency exchange takes place, and Forex keeps traders updated on currency fluctuations. Forex is one of the most traded markets, with a day worth of $5.3 trillion. It is a decentralized market, with foreign exchange transactions carried out over-the-counter. The foreign exchange market is open 24 hours a day, making it easy to trade whenever a trader wants. The foreign exchange rate between currencies keep changing, no two currencies are identical in terms of value. In simple terms, forex is explained.


Which Currencies Are Traded?

In the FOREX market, there are various currencies present. The currency pairs are ranked as per their trading volume. Below given is the list of currency market turnover.

 

 

However, this fluctuation is carried out as actual monetary flows with a major change in GDP growth, inflation, interest rates, MandA deals and certain other macro-economic activities.


Currency Distribution as Per The Currency Market

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Source: BIS

WHAT IS AN EXCHANGE RATE?

The Global FOREX market is a kind of decentralised marketplace that determines the value of a specific asset or currency over emphasis on depository and exchange rate system. There are several transactions, conducted as per the market conditions. There is no chance that the currency value of any country will have the same value and thus the exchange rate between the two currencies.

 

For instance, a currency pair GBP/USD is $1.42. While in intraday session it has increased to $1.49 which means there is an increase by 0.07%. In practice a client will pay 1.49 units of US dollar to get 1 unit of GBP

WHY DO EXCHANGE RATES CHANGE?

Generally, currency market is OTC market and open marketplace where the prices of different currencies are measured. It is different from the normal capital market as it has not standardised procedure and hence it is called as decentralised market. This transaction is conducted by various market participants present in different locations.

There are several factors why the exchange rates fluctuate:

The demand and supply variance that can cause the value of currency to fall or rise. Similarly, there are several other factors that determine the value of a currency:
  • GDP and GNP Growth rate
  • Employment and Inflation rate
  • FDI (Foreign Direct Investments), FII (Foreign Institutional Investors) inflows

The most important feature of the currency market is that it is subject to availability and high amount of liquidity at any given point of time. Hence if you think that the value of yen is going down, then you can sell the currency and can buy US Dollar (JPY/USD). If the price of platinum is going up, then you can buy the commodity (XPT/USD). So it is said that the FOREX market is a trending market.

Market Participants

FOREX market is an OTC market, hence there are several people who can become participant without any regulations, there are several Market participants which are bifurcated into type of usage


Risks of Trading FX

While trading in FOREX industry, one should bear in mind that the traders have a high possibility to make huge profit as well as huge loss due to high amount of leverage the market participants uses. Therefore, the FX trading position is a high risky market and hence may not be suitable for the investors if they can’t afford to lose the money as their initial investments.

History of Forex

Historically the retail investors can only access the FOREX market through banks or through hedge funds for investment or any other commercial purposes. The trading volume has drastically increased from 2007 with $3.21 trillion a day. It has been increasing 20% annually. Many of the exporters use currency market for hedging purposes to save them against the volatility and fluctuation price risk.

But however there is no regulatory body and hence it is considered as Over the Counter (OTC) product. With some of the biggest trading markets such as London, New York, Denmark, Tokyo, Hong Kong, Singapore and Melbourne.

The Foreign Exchange market is so vast that there is hardly any chance of manipulation. The value of a currency is mostly decided by the global macroeconomic conditions.

Basic Forex terms

SpreadThe difference between bid and Ask price is known as Spread.
PIPA PIP is referred to as Percentage in Point which often as a minimum of 0.0001
LeverageA PIP is referred to as Percentage in Point which often as a minimum of 0.0001
Bid PriceIt is the price at which the unit of certain currency is sold.
Ask priceIt is price at which the unit of currency is purchased
Exchange rateIt refers to a rate at which one currency is sold or purchased in relation to quote currency.

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