FOREX or The FOReign EXchange rate market is an international market where various currency exchange transactions take place; this is in the shape of simultaneously buying one currency and selling another. The most commonly traded currencies are referred to as “Majors”; over 85% of daily transactions on Forex trading involve the Majors. These seven currencies are the US Currency (Dollar, USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBY), Swiss Franc (CHF), Canadian Dollar (CAD) and Australian Dollar (AUD). The Forex system in operation today was established in the 1970s when free currency exchange rates were introduced, this period also saw the US Dollar overtake the British Pound as the benchmark currency. Prior to this and in particular during World War II, exchange rate remained more stable.
Forex trading in simplest terms is the buying of one currency and the selling of another. Forex trading, also referred to, as “FX” is open to corporations, small businesses, commercial banks, investment funds and private individuals, it is the largest financial market in the world averaging a daily turnover of over $1 trillion dollars, making it a diverse and exciting market. It is a 24-hour market enabling it to accommodate constant changing world currency exchange rates . According to New York time, trading begins at 2.15pm on Sunday in Sydney and Singapore and progresses through to Tokyo at 7pm, London at 2am and reaches New York at 8am. This leaves investors free to respond to global political, economic and social events when they take place, day or night.
Forex and World Currency Exchange Rates
In this market of currency exchange , the value of major currencies change continually, investors hope to make a profit from the purchase of stronger currencies. If an investor has bought a currency that appreciates in value, a profit will be earned by ‘closing the position'. Closing the position simply refers to the selling back of the appreciated currency in order to collect your profit. These currencies are traded in pairs for example US Dollar/ Japanese Yen (USD/JPY) or EURO/ British Pound (EUR/GBP), trading in pair's values one currency against another, establishing a rate of worth for a global exchange rate. Currency can hold no value unless it has something with which to be compared.
Reading these trade quotes is simplified by remembering the currency listed first is the base currency and the base currency exchange rate is always equal to one. The ‘base' currency is the main currency that is used to evaluate the worth of foreign currency it is the basis for the transaction. Taking the US currency as the center of the Forex trading market where 1USD is equal to 109.21 Japanese Yen (1USD/109.21JPY) this situates the US currency as the base, as the currency exchange quote goes up, the dollar appreciates in value and the Japanese Yen depreciates or weakens. So if foreign currency exchange rates change the quote to 1USD/111.21JPY this would imply the US currency is getting stronger and will earn the investor a larger profit. For the majority of exchange rate the US currency is the base, with the exception of the Euro, British pound and Australian dollar.
The Benefits of Forex Trading
The mechanisms of the currency exchange rates market are similar to the workings of other markets; it has no central location like the stock market, transactions occur over electronic and telephone networks. World currency exchange rates do not only fluctuate during regular office hours, Forex trading can be accessed 24 hours a day as currency exchange rate demands. Forex has superior liquidity to other markets, implying any dealings can be readily converted into accessible hard cash. It is fifty times larger than any similarly structured market ensuring there are always brokers and investors pursuing business. Currency exchange is an objective market; because of its sheer volume manipulation of foreign currency exchange rates would prove very difficult, involving colossal sums of money.
The start up capital required to begin trading on world currency exchange rates is relatively small in comparison to capital required for similar marketplaces. Margin trading, that is trading with a borrowed capital is a frequent feature of Forex trading ; this is similar to a performance bond or good faith deposit. This allows for smaller and independent brokers to deal equally on foreign currency exchange rates. The fees involved in the various transactions are also kept to a minimum; only the difference between buying and selling prices is levied. As trading on currency exchange rate takes place in pairs, there is the potential for investors to make a profit on both rising and falling markets. An environment has been created making it possible to buy and sell currencies without any limitations. Overall, Forex investments provide decent returns; it is a global market, easily accessible with its potentials for profit widely being revealed
