The Forex market, as most of us call it, is actually known as the Foreign Exchange Market. The market, being the single largest market in terms of average turnover in the world, has a mammoth $1.9 trillion in turnover daily.
Yet, despite the huge potential, a lot of people are unaware of what this market actually is and what it does.
What is Forex Trading?
Forex market, simply put, is a market where the buying and selling of one currency for another takes place. This trade is usually done on an international, national and supranational scale. Foreign exchange, on the other hand, is the exchange of these currencies. For example, if a person wants to spend their holidays in China or wants to do shopping in the area, they would need local Chinese currency. What if they aren’t a native and only carry US$ on them? Would they be able to spend the dollar instead of the local currency? It seems highly unlikely.
Hence, to avoid sticky situations like these, foreign exchange is used to get your native currency exchanged with the currency you want to use or trade in. Put quite simply, in a nutshell, such a trading is trading of currencies for one another.
Types of People Using This Form of Trading
There are two kinds of people who use Forex for different purposes. The first of this class of people are governments or companies that trade internationally i.e. buying or selling their services or products in a foreign country. For them, to make use of the profits earned in that country, they need to convert it into their native currency back home. These kinds of people roughly account for nearly 5% of the daily trading turnover.
The second type of people that make use of Forex are traders within the market. They work on speculation and the uncertainty of the market to earn profits for themselves and their fellow investors. The information that is used in the process is often one that the investor believes to be important and relevant while it may have no official standing as far as the market is concerned.
How Does the Trading Work?
It works when one currency is sold in terms of another currency and its payment is made in that currency. Typically, there are pairs created for currencies in which they are commonly traded. For example, a EUR/USD pair, a USD/JPY pair. These pairs determine the exchange rate. For example, one dollar may be equal to 1.5 euro. So to get 100 dollars from the Foreign exchange market, a person would have to pay 150 euros.
This is how the trading market works. Leading companies such as ETX Capital also work on the most commonly liquefied currencies called Majors like 85% of the traders in the Foreign exchange market. An interesting thing about Forex trading is that it has no central market. All the trading is done online. The market is open 24 hours a day since it is a worldwide trade.