The foreign currency market

Foreign exchange trading or forex trading, is a transaction in which one party purchases a quantity of one currency by paying in another currency.

The foreign exchange market is a global decentralized financial market for the exchange for international currencies. The market consists of a range of buyers and sellers executing transactions around the clock, with the exception of weekends. The market provides an opportunity for traders to trade at anytime of the day or night. The value for a wide range of currencies are determined in the forex market by valuing one country's currency against another.

The need for international trade and investment have been seen as the primary reason for the existence of the foreign exchange market. The market also provides a means for speculation, which adds liquidity to the market.

Today, the forex market is a multi-trillion dollar market.

Who trades in the forex market and what are the main currencies traded?

The forex market is traded primarily by:

1. Commercial banks, central banks and other financial institutions
2. Government
3. Currency speculators and brokers
4. Institutional Investors
5. Corporations
6. Travelers and tourists

The most traded currencies in the market are as follows:

1. United States Dollar "Dollar" (USD)
2. Euro (EUR)
3. Japanese Yen (JPY)
4. Pound Sterling (GBP)
5. Australian Dollar (AUD)
6. Swiss Franc (CHF)
7. Canadian Dollar (CAD)
8. Hong Kong Dollar (HKD)
9. Swedish Krona (SEK)
10. New Zealand Dollar (NZD)

The most traded currencies in the world are called the Majors and they constitute the larges share of the currency market. The four pairs traded by most forex traders are the EUR/USD; GBP/USD; USD/CHF and USD/JPY.

A currency pair, similar to the ones described above, is the quotation of a currency unit against the unit of another currency, with the currency being used as reference referred to as the counter currency and the currency quoted in relation is called the base currency.

What is foreign currency trading?

As it relates to individual retail investors and traders, foreign currency trading occurs when the rate for a particular currency pair is speculated. Trades that think that the GBP/USD might go up, will buy, "go long"  and make a profit by selling the pair at a higher rate than it was bought. Similarly, if a trader believes that the GBP/USD will fall, he would sell the pair then buy it back at a lower price, making a profit in the process. This is called "shorting the market". All trading which takes place by individual investors and retailers  must be conducted through a broker. The broker charges a small fee to execute each transaction called the "spread" i.e. the difference between the bid and ask price of a particular currency pair quoted by your broker.