The forex still known as the foreign exchange market is the most traded financial market in the world. The daily turnover amounts to more than six billion US dollars. It is open for investors and speculators like banks, businesses to buy and sell currencies. However, novice traders find it difficult to understand how it works. In this article, we are going to tell you in detail how the currency market works.
Forex: how does it work?
How Forex Works is very easy to understand. the forex trading is the act of buying one currency while selling another simultaneously. This consists of betting on the evolution of foreign exchange. You must therefore speculate on the rise or fall of currencies.
In forex, currencies can be quoted in pairs. We have on the left the base currency and on the right the quote currency. For example, for the currency pair GBP / EUR = 1.17, the base is GBP (pound sterling) and the quote base is EUR (euros).
This means that to buy 1 pound sterling you have to pay 1.17 euro. By buying a GBP / EUR currency pair, you are betting on the rise of the pound against the euro. This also means that you are betting on the fall of the pound sterling. In the event of a sale, you are going to bet on a fall of the pound sterling on the euro, therefore a rise of the euro against the pound sterling.
In short, a trader will buy if he thinks that the value of a specific base currency will increase. The sale should be made when speculation shows that the base currency will decline.
Factors that move the forex market
Forex is made up of several currencies, which can make forecasts of exchange rate difficult (we are not at blackjack), because many factors contribute to their fluctuation. Forex is determined primarily by the forces of demand and supply as in any financial market. This is why it is therefore important to be aware of the influences that cause prices to fluctuate. These include:
- interest rates;
- the rate of economic growth;
- supply and demand on a currency pair;
- political and economic events;
- natural disasters.
These different factors create a daily volatility which can offer new opportunities to a trader. There are several online platforms where you can buy and sell currencies from your laptop, PC or tablet.
Forex: an accessible and regulated market
In forex, exchanges are over-the-counter between market participants. It could be a broker, a company or a central bank. Unlike traditional securities like stocks, forex is not managed by a stockbroker. There is no such thing as a centralized exchange platform.
Traditionally many forex transactions were carried out through a broker. But with the rise of online trading, you can profit from forex price movement using derivatives.
Moreover, there is also no single regulatory body to control this foreign exchange market. With forex, each country has a national regulator that oversees financial intermediaries and currency trading. For example, the exchange market is monitored in France by the Autorité des Marchés Financiers (AMF), which has been in place since 2003.
Finally, you don’t need to have a large amount of money before you start trading. Many transactions take place there every day, which makes it easier to buy or sell currency quickly, as the demand is high. Unlike other financial markets, the foreign exchange market is open for trading 24 hours a day, 5 days a week from Sunday evening to Friday evening.