What is forex
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Thread: What is forex

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    Expert-monitor.M's Avatar

    What is forex

    The Forex Market

    The foreign exchange market, also known as Forex or FX, is the largest financial market in the world. According to Reuters the average Forex daily value crossed five trillion USD in March 2012. Babypips.com adds that if this number is compared to New York Stock Exchange’s volume of 22.4 billion USD, the graph looks something like this:

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    However, this number includes the whole global foreign exchange market, whereas the retail traders, who are trading the spot market, have the accessible volume of approximately 1.49 trillion USD a day.

    At first Forex trading can be a bit confusing as you are not buying anything physical. Therefore you can for example think of buying a currency as buying a share in a particular country similar to buying stocks of a company. This way the price of the currency is a direct reflection of what the market thinks about the current and future health of the economy.

    For instance if you buy the British Pound (GBP), you are basically buying a share in the British economy. This means you are betting that the British economy is doing well, and will even get better as time goes. Once you sell those shares back to the market you will hopefully end up with a profit.

    In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to other countries' economies.

    The Major Currencies and Currency Pairs:
    [Only registered and activated users can see links. ]

    As the currencies are always traded in pairs, Forex trading is simultaneous buying of one currency and selling another.
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    Market Size and Liquidity

    The Forex market is an Over-the-Counter (OTC) market, which means that the entire market is run electronically within a network of banks continuously over a 24-hour period. The Forex OTC market is also the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.

    The chart below shows the percentages of the most actively traded currencies during the years 1998-2010 according to Global Finance. Please note that not all of the currencies were used anymore in the Year 2010 and as currencies are traded in pairs the total percentage sums up to 200 instead of 100.

    [Only registered and activated users can see links. ]

    The next chart shows the official foreign exchange reserves according to International Monetary Fund (IMF):

    [Only registered and activated users can see links. ]

    However, an important thing to note about the Forex market is that most currency trading is based on speculation. In other words, most trading volume comes from traders that buy and sell based on price movements during a day. Baby pips.com estimates that the trading volume brought about by the speculators is estimated to be more than 90%!

    The scale of the Forex speculative market means that liquidity - the amount of buying and selling volume happening at any given time - is extremely high making it easy for anyone to buy and sell currencies. From the perspective of an investor, liquidity is very important as it determines how easily price can change over a given time period. A liquid market environment like Forex enables huge trading volumes to happen with very little effect on price, or price action.

    Nevertheless, despite the Forex market is relatively very liquid the market depth can change depending on the currency pair and time of day.

    Your Sincerely!
    Copy Right >> finfx

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    Master.Trader (10-23-2013)

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