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What is Forex Market & How Does It Work

What is Forex

Forex Market is a decentralized global market where all the world's currencies are traded against each other, and traders make a profit or loss from the currencies’ value changes. Forex Market is also known as Foreign Exchange Market, FX or Currency Trading Market.
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It’s easy isn’t it? Forex Market offers traders huge opportunities to benefit from fluctuations in the currency markets. The size of the market is really big, but the way the FX Market functions, unlike other financial markets, is quite simple.

So, what is Forex market? Let’s take a closer look at it.

What Is Forex Trading?

Forex market is the largest market in the world with an average trading value over $5 trillion per day.

Forex beginners are often wondering - Where Forex Market is located? The question is - Forex has no centralized marketplace where transactions are conducted. Forex trading is carried out electronically over-the-counter (OTC), meaning that all trading transactions are performed via computer by traders and other market participants over the world.

With no centralized location of trades, the forex market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide across almost every time zone.

Forex Market is the most liquid market and its high liquidity means that prices can change rapidly in response to news and short-term events, creating multiple trading opportunities.

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Trading is mostly about making Right Forecast.
world map

How to Trade Forex

Now, after answering the question "What is Forex Market?", let's see exactly how Forex Market works.

The trade that takes place in Foreign exchange market involves simultaneously the buying of one currency and the selling of another. This is because the value of one currency is relative to the other currency and is determined by their comparison. From a retail trader’s perspective Forex trading is the speculation on the value of one currency relative to another.

Here’s how it goes:

Buying one currency and the selling another at the same time on foreign exchange market is called trading forex. It could become a great source of income, but before starting trading forex first you should understand basic concepts:

  • Base currency is the first currency that appears in a forex pair quotation. In the foreign exchange market, one currency will always be quoted in relation to another because you are buying one while selling the other. Quote currency is the second currency listed in a forex pair. It is also known as the counter currency. The price of a forex pair reflects how much it costs to purchase one unit of the base currency by selling the quote currency. In a pair listed as GBP/USD, USD is the quote currency. Exchange rate is the price of one currency in terms of another currency.
  • The Long position refers to the purchase of an asset with the expectation it will increase in value - a bullish attitude.
  • If trader enters a short position, it means he or she expects the price of the underlying currency to go down. To short a currency means to sell the underlying currency in the hope that its price will go down in the future, allowing the trader to buy the same currency back at a later date but at a lower price.
  • The Bid price is the price a forex trader is willing to sell a currency pair for. Ask price is the price a trader will buy a currency pair at. Both of these prices are given in real-time and are constantly updating.
  • Spread is the difference between the bid price and the asking price.

Now that you know basic concepts let’s move on to the next steps.

1. Select a currency pair

When trading forex you will always buy one currency while selling another at the same time. Because of this, you will always trade currencies in a pair. Most new traders will start out by trading the most commonly offered pairs of major currencies, but you can trade any currency pair that is available on the trading platform as long as you have enough money in your account.

2. Analyze the market

Research and analysis is the foundation of trading endeavors. During researching, you’ll find great amount of forex resources, which is overwhelming at first. But as you research a particular currency pair, you’ll find valuable resources that stand out from the rest.

3. Read the quote

You’ll see two prices shown for currency pairs (picture showing base and quote currency). The first rate is the price at which you can sell the currency pair and the second rate is the price at which you can buy the currency pair. Difference between the two rates is called the spread. You can view our live spreads.

4. Pick your position

In Forex trading you can speculate the currency on up and down movements in the market.

  • With a buy position you believe that the value of the base currency will rise compared to the quote currency. For example if you are buying EUR/USD, you believe the price of the euro will strengthen against the dollar.
  • With a sell position you believe that the value of the base currency will fall compared to the quote currency. For example if you’re selling EUR/USD, you believe the price of the euro will weaken against the dollar.
What is Forex Market

However, the risk is always there. If you buy Euro against the U.S. dollar, expecting that Euro is going to rise in price, but instead the U.S. dollar strengthens, you will then suffer losses. So, besides the benefit that you can make from forex trading, you should always consider the risk involved in it.

How to Trade on Forex Market

As you could see the foreign exchange market is not so complex to understand and not so dangerous to enter. You can become one of the participants of the market in a few minutes and start earning money more than easily.

What’s stopping you? ... Just give it a go

How to learn Forex trading and specifically how to use trading platform are thoroughly presented on our website. You can read our educational materials and trading e-books which will help you understand the essence of Forex trading, discover its benefits, learn how to trade effectively and how to manage your risk.

History of Forex Market

The history of Forex market is marked by two particular events which put a deep stamp on its formation and development. These two historical events are the creation of Gold Standard System and Bretton Woods System.

Gold Standard and Bretton Woods Systems

Gold Standard System was formed in 1875. The main idea behind it was that governments guaranteed that a currency would be backed by gold. All the major economic countries defined an amount of currency to an ounce of gold as the value of their currencies in terms of gold and the ratios for these amounts became the exchange rates for these currencies. This marked the first standardized means of currency exchange in history. However, World War I caused a breakdown of the gold standard system as countries sought to pursue economic policies which would not be constrained by the fixed exchange rate system of the Gold Standard.

In July 1944 more than 700 representatives from the Allied nations brought forward the importance of a monetary system which would fill the gap left behind the gold standard. They arranged a meeting at Bretton Woods, New Hampshire, to set up a system that would be called the Bretton Woods system of international monetary management. The creation of Bretton Woods System led to the formation of fixed exchange rates as the United States defined the value of US dollar in terms of gold equal to $ 35 for one ounce and other countries pegged their currencies to the dollar. The US dollar became the main reserve currency and the only currency that was backed by gold. However, in 1970 the U.S. gold reserves were so depleted that it was impossible for the U.S. treasury to cover all the reserves held by foreign central banks.

In August 1971 the U.S. announced it would no longer exchange gold for the U.S. dollars that foreign central banks had in reserve .This was the end of Bretton Woods System and the beginning of Forex Trading System.

Forex Market Hours

The currency exchange market never sleeps, and the quotes constantly change. This is the only market open around the clock five days a week. Large volumes of currencies are traded on the international interbank market in Zurich, Hong Kong, New York, Tokyo, Frankfurt, London, Sydney, Paris and other global financial centers. This means that the interbank market is always open - when the working day ends in one part of the world, banks in the other hemisphere have already opened their doors and the trade goes on.

No time frames - a very important condition for traders with a busy working schedule. They do not need to worry about opening and closing hours of trading sessions on the interbank market and are free to arrange their trade anytime they want, since it does not matter for Forex traders which bank provides liquidity for their transactions.
But the Forex market liquidity can change during the day, depending on which time zone banks are operating at the moment (when liquidity falls, spreads grow and the speed of price changes slows down). For example, the pairs with the Japanese yen will be the most liquid during the working time of Japanese banks.

Below you can find the opening and closing hours of trading sessions on the interbank market (i.e. periods of high liquidity), determined by the opening hours of the largest banks in each time zone.

Sydney
7:00 PM - 4:00 PM (CET)
Tokyo
7:00 PM - 4:00 PM (CET)
London
3:00 AM - 12:00 PM (CET)
New York
8:00 AM - 5:00 PM (CET)

Participants of Foreign Exchange Market

Foreign exchange market is composed of different participants, also called Forex market players, who trade on the market for quite various reasons. This means that participating in Forex market transactions does not take place simply for speculative purpose. Each of the participants plays its own role in the market providing the latter’s wholeness and stability.

The main players of the market are

  • Governments and Central Banks
  • Commercial banks and companies
  • Hedge funds
  • Brokerage companies
  • Investors
  • Retail Forex traders
  • Speculators

FAQs

How does Forex Work?

Forex (Foreign Exchange) is a huge network of currency traders, who sell and buy currencies at determined prices, and this kind of transfer requires converting the currency of one country to another. Forex trading is performed electronically over-the-counter (OTC), which means the FX market is decentralized and all trades are conducted via computer networks.

What is Forex Market?

The Forex market is the largest and most traded market in the world. Its average daily turnover amounted to $6,6 trillion in 2019 ($1.9 trillion in 2004). Forex is based on free currency conversion, which means there is no government interference in exchange operations.

What is Forex Trading?

Forex trading is the process of buying and selling currencies at agreed prices. Most currency conversion operations are carried out for profit.

What is The Best Forex Trading Platform?

IFC Markets offers 3 trading platforms: MetaTrader4, MetaTrader5, NetTradeX. MT 4 Forex trading platform is one of the most downloaded platforms which is available on PC, iOS, Mac OS and Android. It has different indicators necessary for making accurate technical analysis. NetTradeX is another trading platform offered by IFC Markets and designed for CFD and Forex trading. NTTX is known for its user-friendly interface, reliability, valuable tools for technical analysis, distinguished functionality and the opportunity to create Personal Composite Instruments (PCI) which is available specifically on NetTradeX.

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