A Quick Overview of the Foreign Exchange (Forex)

This hub will go over the basics of the Foreign Exchange Market including a definition, a quick history lesson, how the commercial banks play their part, and finally the advantages of trading in the Forex market.

So what is Forex?

Forex is derived from the words Foreign Exchange and in its simplest definition is the exchange of currencies and different rates which results in a profit (or loss) for investors.

Sometimes it is also called Spot FX or simply just FX.

What is the History behind it?

The Forex market was established in 1971 when currency exchange rates began to float (become available to trade).  At first it was not available to small traders and you needed a large transaction size and often strict financial criteria before you were allowed to trade.

Today however, it is open to anyone that wishes to trade and you only need a minimum deposit account of $100 to begin.

Generally commercial banks will facilitate the transactions between the two trades (the buy and sell).  They also can lend money or “speculate” against certain trades where they believe the gain will be worth more.  Of course, individuals can also speculate in the currency market such as the most famous (and successful) trader - George Soros.

No one bank would be able to handle all the trades anyway, which is why so many different banks (or certain individuals) do so.  Most trade volume however is done by one of the 300 large international banks which you would need to get an account with first to do your trading.

Advantages of Trading the Forex Market

There are four main advantages of trading the Forex market over the regular stock market and they include:

LIQUIDITY: Because the Forex market is open 24 hours and day and there are so many people involved in it, there will always be a buyer or seller no matter when you choose to trade.  Being highly liquid lowers your risk somewhat because you can get in or out of trades quickly.

ACCESS: Because the market is open 24 hours a day you can react to news or changes immediately when they happen rather than have to wait until the opening and closing times of the stock exchange.

TRENDS: The currency market (more so than the stock market) tends to demonstrate more predictable patterns which makes it easier to make decisions on your buy and sell trades.

LIMITED NUMBER OF CURRENCIES: With the stock market there are thousands of companies to choose from which can be difficult to choose from, however with currencies you are limited to under 200 to keep track of at any one time.