What is Forex Trading?

The place where currencies are traded is called the foreign exchange market. Currencies are very essential to most people around the globe, whether they know it or not, because currencies need to be traded in order to conduct foreign trade and business.

If you are residing in the U.S and you want to purchase cheese from France, it’s either you or the company that you purchase the cheese from has to pay the French for the cheese in euros (EUR).This means that the U.S. trader would have to exchange the corresponding price of U.S dollars into euros. The same holds true for traveling.

For a French to travel in Egypt, he can’t pay in euros to see the great pyramids because it is not the locally recognized currency. Essentially, the traveler needs to exchange the euros for the local currency, which in this case is the Egyptian pound, at their current exchange rate.

The main reason the forex market is the biggest and most marketable financial market is because of the demand to trade currencies. It is larger in size compared to other markets—even bigger the stock market, with an average traded value of about USD 2,000 billion a day.

One exceptional feature of this international market is that there is no central marketplace for foreign exchange.To some extent, currency trading is directed electronically over-the-counter (OTC), meaning that all dealings transpire by means of computer networks between traders around the globe, instead of on one centralized exchange.

The currency market is open 24 hours a day, five and a half days a week. Currencies are traded globally in the major financial centers of London, New York, Tokyo, Hong Kong, Singapore, Paris, Sydney, Zurich, Frankfurt, and almost every time zone.That means that when the trading session in the U.S. is over, the forex market starts over again in Tokyo and Hongkong.

Basically, the forex market can be exceptionally active any time of the day and the price offers are changing regularly.

Spot, Forwards and Futures Markets 

There are three ways by which institutions, corporations and individuals trade forex namely, the spot market, forwards market and the futures market. Spot market in forex trading has always been the biggest market because it is the “underlying” real asset that the forwards and futures market are based on.

However, in the past, the futures market was the most well-known venue for traders since it was accessible to individual stockholders for a longer period of time. Nevertheless, with the emergence of electronic trading, the spot market has supported an enormous increase in activity and now beats the futures market as the preferred trading market for individual investors and speculators

When individuals are talking about the sforex market, they generally are talking about spot market. However, forwards and futures markets are more known with companies that are interested to hedge their foreign trade risks out to a definite date in the future.

The forwards and futures markets, does not trade actual currencies, unlike the spot market. Instead, they deal in contracts that signify privileges to a definite currency type, a particular price per unit and a future date for the payment.

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