Forex Trading Tutorial: What is the Forex?
What is the Forex? | History of Forex Trading | Forex Market Background | Advantages of Forex Trading | Who Are Forex Market Participants? | Role of the Exchange Rate | Types of Orders | Payment and Settlement Systems | Exchange Rate Determination
 
What is the Forex?
FOREX = FOReign EXchange.
You can trade 24 hours a day.
The FOREX is larger than all other financial markets COMBINED.
The Foreign Exchange (FOREX) market is a cash (or “spot”) interbank market established in 1971 when floating exchange rates began to materialize. This market is the arena in which the currency of one country is exchanged for those of another and where settlements for international business are made.
The FOREX is a group of approximately 4500 currency trading institutions, including international banks, government central banks and commercial companies. Payments for exports and imports flow through the Foreign Exchange Market, as well as payments for purchases and sales of assets. This is called the “consumer” foreign exchange market. There is also a “speculator” segment in the FOREX Companies, which have large financial exposures to overseas economies participate in the FOREX to offset the risks of international investing.
Historically, the FOREX interbank market was not available for small speculators.
With a previous minimum transaction size and often-stringent financial requirements, the small trader was excluded from participation in this market. But today market maker brokers are allowed to break down the large interbank units and offer small traders the opportunity to buy or sell any number of these smaller units (lots).
Commercial banks play two roles in the FOREX market:
(1) They facilitate transactions between two parties, such as companies wishing to exchange currencies (consumers).
(2) They speculate by buying and selling currencies. The banks take positions in certain currencies because they believe they will be worth more (if “buying long”) or less (if “selling short”) in the future. It has been estimated that international banks generate up to 70% of their revenues from currency speculation. Other speculators include many of the worlds’ most successful traders, such as George Soros.
The third category of the FOREX includes various countries’ central banks, like the U.S. Federal Reserve. They participate in the FOREX to serve the financial interests of their country. When a central bank buys and sells its or a foreign currency the purpose is to stabilize their own currency’s value.
The FOREX is so large and is composed of so many participants, that no one player, even the government central banks, can control the market. In comparison to the daily trading volume averages of the $300 billion in the U.S.
Treasury Bond market and the approximately $100 billion exchanged in the U.S. stock markets, the FOREX is huge, and has grown in excess of $1.5 trillion daily.
The word “market” is a slight misnomer in describing FOREX trading. There is no centralized location for trading activity (“pit”) as there is in the currency futures (and many other) markets. Trading occurs over the phone and through the computer terminals at hundreds of locations worldwide. The bulk of the trading is between approximately 300 large international banks, which process transactions for large companies, governments and for their own accounts. These banks are continually providing prices (“bid” to buy and “ask” to sell) for each other and the broader market. The most recent quotation from one of these banks is considered the market’s current price for that currency. Various private data reporting services provide this “live” price information via the Internet.
WHY WE NEED FOREIGN EXCHANGE:
Almost every nation has its own national currency or monetary unit—its dollar, its peso, its rupee—used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for “foreign exchange” transactions—exchanges of one currency for another. 
What is the Forex? | History of Forex Trading | Forex Market Background | Advantages of Forex Trading | Who Are Forex Market Participants? | Role of the Exchange Rate | Types of Orders | Payment and Settlement Systems | Exchange Rate Determination
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