The terms FX, Forex, and foreign currencies are not foreign to the people who trade on international markets. The foreign exchange market is an international trading platform where traders sell, buy or speculate on the exchange of currencies from around the world. The currencies are generally in currency pairs. The foreign exchange market comprises forex dealers, central banks, hedge funds, management firms, investors, and traders.
It is one of the first financial markets to contribute significantly to the global economy. Now, it is also considered one of the largest financial markets in the world, which is also responsible for currency conversions in international trade settlements and other foreign investments.
Trading in the foreign exchange market
The exchange in the foreign market happens through pairs where the value of one currency will be higher than the other in the pair. This helps determine the amount of currency that can be bought from one country by another. This system also helps establish liquidity among other currencies to maintain overall market stability.
The value of a currency depends on whether one of the two:
- Free float – value is determined by the market forces like the supply and demand relationships
- Fixed float – this value is determined by a country’s governing body, like the rupee, US dollars, etc.
One of the best features of the forex market is it is a 24 hours market that is closed on weekends. However, if one forex hub closes, the other opens from another part of the world. In this way, there will be liquidity in the market, attracting the largest appeal class. The best liquid trading pairs are:
- EUR/USD
- USD/JPY
- GBP/USD
Types of foreign exchange markets
There are three major types of foreign exchange markets, they are:
- Spot forex market: It is where the immediate exchange of currencies occurs. This type occupies most of the market, involving investors and buyers from around the world in the financial sector.
- Forward Forex market: This type has an agreement with the buyer and the sellers where currencies are exchanged at the discussed price, and a date is also set for future exchange. In this type of exchange, there is no actual exchange of currencies, but there is an exchange of value. It is often used for hedging.
- Futures forex market: It is similar to the forward forex market, where the currency values are exchanged on the agreed date and price. However, the only difference is that this market is regulated on the exchange. Since this type also removes the risk of exchange from other markets, it is also used in hedging.
Advantages of foreign exchange market trading
- The market is not suitable for rules
- No cleaning houses and other bodies which oversee the whereabouts of the market
- No commissions for investors
- You can use as many currencies as you want
