Forex is simply Foreign currency and exchange. Foreign exchange is the process of replacing or converting one currency into another currency simply for commerce, trading and other reasons.
The forex market is a market where Currencies are traded. Currencies are important to most people around the world.
Currencies are traded in order to conduct foreign trade and businesses. Currency exchange and trading first occured in ancient times.
Money changers help people change their money and take a commission or a charging fee for the work. Money changers were also the silversmith or the Goldsmith of more recent ancient times.
Currency and exchange were important elements of trade in the ancient world enabling people to buy and see items like food, raw materials and so on.
If a Greek coin held more gold than an Egyptian coin due to its size or content, then a merchant could barter fewer Greek gold for more Egyptian coin, or for more material goods.
This is why, at some point,most world currencies in circulation today had a value fixed to a specific quantity of a recognized standard which could be the silver or the gold.
From 1899 to 1913, forex holdings of companies increased at an annual rate of 10.8% , while holdings of gold increased at 6.3% between 1903 to 1913 at an annual rate. Modern Forex began forming in 1970s and rules commercial and financial bodies were set after World war II under the Bretton woods system of monetary management.
Forex market is by far the largest market in the world as the main participants are the larger international banks. Forex market works through financial institutions and operates on several level.
Banks are turned to a smaller number of financial firms known as “dealers” who are involved in large quantities of foreign exchange trading. The bank dealers are also called the “interbank market”.
Trades between forex dealers can be very large involving million of dollars and because of autarchy issues when 2 Currencies involved, forex could have little or no supervisory entity regulating it’s actions.
Forex market determines foreign exchange rate for every currency. Forex involves all aspects of buying, selling and exchanging currencies at a determined price.
Currencies are traded in pairs,, as the market does not set an absolute value on a currency but rather determines it’s relative value by setting the market price of one currency paid for with another currency.
In a typical forex transaction, a party purchases some quantity of one currency by paying some quantity of another currency.
Why Forex trading is unique
Forex market is unique because of certain characteristics such as;
- Its geographical dispersion
- It uses leverage to enhance profit and loss management
- It has huge trading volume
- Low margin of relative profit compared with other markets of fixed income
- Continuous operation which is not restricted to a particular day or time.
Foreign exchange is traded in an over-the-counter market where brokers or dealers negotiate directly with one another, so there is no central exchange. According to the Bank of international settlement, results from 2019 shows that trading in forex market averaged $6.6 trillion per day in April.
Forex market assists international trade and investment by enabling currency conversion. It permits a business in a different country to import goods for another and pay the monetary value for the latter, even though it’s income is in the formers’ currency.
Forex market also support direct speculation and evaluation relative to the value of currencies based on the differential interest rate between 2 countries