Forex is short hand for foreign exchange. Forex is the buying and selling of national currencies such as US dollars, GB pounds, Japanese yen, Canada, New Zealand and Australian dollars, Swiss francs and the Euro. These eight forex currencies are known as the eight major currencies.
Who are the buyers and sellers in the forex market? Currency trading institutions such as national and international banks and companies are the main players in the forex market. For example a multinational American corporation may need to buy machinery in Germany or pay a pension to a retired employ that lives in Canada and will therefore need to buy and sell euros and Canada dollars. There are also speculating traders in the forex market, some of them professional and working within financial institutions, and other individuals working on their own.
How big is the forex market? The short answer is ENORMOUS! It is estimated that every day 3 trillion dollars changes hands in forex. It is by far the single biggest market in the World. Larger in fact than all other money markets added together. The central banks of nation states are the biggest players in the forex markets as they try to find ‘safe’ assets in which to hold their national riches. For example China holds the most US dollars of any country outside of the USA.
Why do traders trade in forex? Only about 10% of the forex transactions are what could be called genuine trades to facilitate genuine business. 90% of the trades in forex are speculative. Institutions and people are aiming to make money from the constant movements in the Worlds’ currencies. Money is made when you buy low and sell high or sell high and buy low (this is called short selling).
How does the forex market work? There isn’t a single physical place where forex trading takes place. It is all conducted on the Internet. To operate in this market an individual needs to open a trading account with any one of the many trading platforms. The trader puts in a minimum stake of about $1500 for a ‘mini account’. Of course the size of stake can vary to much higher levels than this. The trading platforms, often operated by international banks, then ‘leverage’ the trader stake by 100 times and provide the graphs and data that the trader uses to transact batches of currency in pairs. For example a trader could buy $100.000 worth of GB pounds at a moment in time. This is the USDGBP currency pair. The platform/bank offer this batch at several ‘pips’ above the current market price. Pips are 1/10,000th of a dollar. When the currency pair moves up then the trader sells to make a profit. Unfortunately when the currency pair moved down the trader can very quickly lose their stake.