The foreign exchange market, also known as the forex market, is the place where individuals and financial firms trade different currencies. Whether you like it or not, currencies are crucial for today’s global economy. Currencies must be exchanged to perform foreign business and trade.
For example, if your business is in California, USA and you need to buy cacao beans from Brazil as a raw ingredient, you need to pay the Brazilian supplier for the cacao beans in real, which is the official currency of Brazil. As an importer, you need to exchange the same value of US dollars into real.
Even if you are not into global trade, you are affected by the forex market when you travel overseas. A Chinese tourist in France can’t pay in renminbi to visit the Eiffel Tower because the Chinese currency is not accepted in France. Hence, the tourist needs to exchange the renminbi for the local currency, in this case, the euro, at the existing forex rate between the two currencies.
The worldwide need to exchange currencies for trade is the main reason why the foreign exchange market is the most liquid and largest financial market in the world. It is even larger than the stock market. The total volume is not consistent all the time, but as of April 2013, the Bank of International Settlements or BIS reported that the foreign exchange market traded in excess of US $5.3 trillion every day.
One special aspect of forex as a global market is that there’s no central market for the trade Instead, the trading is conducted digitally through over the counter platforms. This means that all transactions happen through computer networks of traders across the globe instead of one central market.
One advantage of trading in the forex market is you can do the trade 24 hours a day but for five and a half days every week. Currencies are traded worldwide in the primary financial centers in New York, Zurich, Hong Kong, Paris, London, Tokyo, Frankfurt, Singapore, and Sydney. This is across most time zones. Hence, even if the trading ends in the US, the forex market will start again in Hong Kong and Tokyo. So you can trade in the forex market any time of the day, with price rates changing every hour.
Go one step further with these related books:
- Forex For Beginners
- A Three Dimensional Approach To Forex Trading
- Understanding Price Action: practical analysis of the 5-minute time frame
- Quantitative Trading with R: Understanding Mathematical and Computational Tools from a Quant’s Perspective
- The Death of Money: The Coming Collapse of the International Monetary System
- Economics of Monetary Union