Covering the basics of the forex market
The
foreign exchange, or forex, market is relatively young, having begun in the
early 1970s after the United States dropped the gold standard and national
currencies started to fluctuate widely. For about 30 years prior to that, most
nations had agreed to keep their currency values stable in relation to the U.S.
dollar, making a forex market unnecessary. With that no longer the case, banks
quickly realized that a profit could be made in “buying” currency when it was devalued
and “selling” it after it strengthened, just like any other commodity.
Today,
the forex market handles about $1.9 trillion in transactions every day, and it
runs 24 hours a day, five days a week. (With nations around the world involved,
it’s always daytime somewhere.) The most traded currencies are the U.S. dollar,
the euro, Japanese yen, British pound, Swiss franc and Australian dollar.
The
forex market is overwhelmingly dominated by international banks, government
banks, investment banks, corporations, and hedge funds. In fact, individual
traders account for only about 2 percent of the market. Nonetheless, a lot of
people do try their hand at it, with varying degrees of success.
In the forex market, transactions are always handled in pairs: You buy one currency and sell another one. The idea is to make a trade when you believe the currency you’re buying is going to go up in value compared to the one you’re selling. Then, if it turns out your prediction was
correct,
you do another trade in the reverse direction -- selling the currency you
originally bought and buying the one you sold -- in order to reap the profits.
For
example, let’s say the market reports this: GBP/EUR 1.2200. That means the cost
of buying one British pound is 1.22 euros. If you believed that course was
going to change, and the euro was going to become more valuable than the pound,
you might sell 100,000 pounds, buy 100,000 euros, and wait. Then let’s say a
few weeks later, the exchange rate fluctuates to this: EUR/GBP 1.3100. Sure
enough, the euro is now worth 1.31 pounds, a profit of 0.11 per unit.
The
forex market is vast and daunting and mostly inhabited by giant organizations.
But it can be navigated by individuals who have studied the finer points and
who want to take a risk on something potential profitable. And since the whole
world uses money, the trading of that money is always going to be a major force
in the financial world.
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