What is the Foreign Exchange?

By: Mark Molina

Copyright (c) 2007 Mark Molina

Foreign Exchange is the simultaneous buying of one currency and selling of another. The off exchange retail foreign currency market ( FOREX ) is the largest financial market in the world, with a volume of over $1.9 trillion daily. Unlike other financial markets, the Forex market has no physical location, no central exchange.

It operates through an electronic network of banks, corporations and individuals trading one currency for another, spanning from one zone to another across the major financial centers. Traditionally, investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes.

Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. High liquidity - The Forex market with an average trading volume of over $1.9 trillion per day. It is the most liquid market in the world.

Low transaction cost - The retail transaction cost (the bid/ask spread) is typically less than 0.1% (10 pips or points) under normal market conditions.

At larger dealers, the spread could be smaller. Uncorrelated to the stock market - A trader in the Forex market involves selling or buying one currency against another.

Thus, there is no correlation between the foreign currency market and the stock market. Bull market or a bear market for a currency is defined in terms of the outlook for its relative value against other currencies. If the outlook is positive, we have a bull market in which a trader profits by buying the currency against other currencies.

Conversely, if the outlook is pessimistic, we have a bull market for other currencies and traders take profits by selling the currency against other currencies. In either case, there is always a good market trading opportunity for a trader. Inter-bank market - The backbone of the Forex market consists of a global network of dealers.

They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and telephones. There are no organized exchanges to serves a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The Forex market operates in a manner similar to the way the NASDAQ market in the United States operates, thus it is also referred to as an over the counter ( OTC ) market.

No one can corner the market - The Forex market is so vast and has so many participants that no single entity, not even a central bankPsychology Articles, can control the market price for an extended period of time. Even interventions by mighty central banks are becoming increasingly ineffectual and short lived. Thus central banks are becoming less and less inclined to intervene to manipulate market prices.

Foreign Exchange
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