Forex stands for foreign currency exchange.
The foreign exchange market (currency, forex, or FX) trades a variety of currencies. It lets banks and other institutions easily buy and sell different currencies.
The foreign exchange market serves to help international investment and trade. It helps businesses convert one currency to another. For instance, it allows a U.S. business to import European goods with payment of Euros, even if the business’s income is in U.S. dollars.
In a foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is very unique due to:
-
- its trading volumes,
- the extreme liquidity of the market,
- its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday) and its geographical dispersion,
- the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
- the use of leverage and the variety of factors that affect exchange rates.
Main foreign exchange market turnover, 1988 – 2007, measured in billions of U.S. dollars.
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world’s main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
-
- $1.005 trillion in spot transactions
- $362 billion in outright forwards
- $1.714 trillion in foreign exchange swaps
- $129 billion estimated gaps in reporting
(data according to wikipedia)
Do you want to benefit from the Forex trade?
Learn with us!