|The Basics of the Foreign Exchange Market|
The Basics of the Foreign Exchange Market
The foreign exchange market is the market where currencies of different countries are bought and sold. It is primarily an over the counter market with trades accounting for most foreign currency transactions.
Apart from large commercial banks, the other participants of foreign exchange market are brokers who match buyers and sellers, customers of brokers or banks, and central banks. It is necessary to know the basics of foreign exchange market before you actually start trading forex.
But the main question is why do we need foreign exchange market? If we want to buy foreign goods or a country wants to invest in other country, companies or individuals first need to buy the currency of that country with which they are going to do the business.
There comes the requirement of foreign exchange market or FX market where one can buy and sell currencies. Here, the price of one currency is determined on the price of the other currency. This rate is called exchange rate.
When we talk about the basics of foreign exchange market, we should know that this market is not like traditional market where trade takes place. Foreign exchange market is a worldwide network of traders, connected by telephone lines and computer screens.
There is no central location of this market. However, there are three major centers that handle the majority of transactions: United States, United Kingdom and Japan. The remaining transactions in the market are controlled from Singapore, Switzerland, Hong Kong, Germany, France and Australia.
Usually, a trading day starts at 8 am in London and ends in Singapore and Hong Kong. When it is 1 pm in London, the New York market opens for business. Later in the afternoon the San Francisco market opens. As the market closes in San Francisco, the Singapore and Hong Kong markets start their day - so trading goes on 24 hours. The main reason that makes the markets open 24 hours a day is - high demand of currencies.
The foreign exchange market is not only an enormous market in the world; it is also the most volatile market with an estimated 2 trillion dollars changing hands everyday. Traders in the foreign exchange market make thousands of trade daily by buying and selling currencies while exchanging market information.
The money that is traded are used for the import and export needs of companies or individuals, for direct investment, to profit from short-term, fluctuations in exchange rates, to manage existing positions and to purchase foreign financial instruments.
According to the basics of foreign exchange market, 6 major currency pairs are traded most in the market. These are: EUR/USD, JPY/USD, USD/CHF, AUD/USD, GBP/USD and USD/CAD.
The basics of foreign exchange market also state that, as a trader you should constantly try to predict the behavior of other market participants. If the traders can correctly anticipate their opponents' strategies, they can act first and beat the competition.