The FOREX or Foreign Exchange market is not a “place”. Instead, it is the collective total of all currency traders around the world. Because currency is required to pay for goods and services anywhere in the world, travelers must be sure to have an ample supply of currency on-hand in order to function daily while abroad. Since most vendors in a country only accept the local currency, travelers are required in most cases to exchange the currency of their country for the currency of the country in which they are travelling. This forms the basis of the forex market.
The forex market is the biggest financial market in the world (trading the equivalent of around 2 trillion US dollars every day, way bigger than the stock market). The exciting thing about the Forex market is that there is no single central trading location. Foreign currency traders operate in the major financial centers around the globe. The Forex market runs over five days a week, 24 hours every day with all transactions occurring electronically across the globe at all hours.
Forex Trading Methods:
The spot market. Currencies are bought and sold in the spot market. The price of any given foreign currency depends upon many factors, but is essentially dependent upon supply and demand. Supply and demand are affected by political and economic conditions, interest rates, and speculation on future performance of a particular currency. An actual spot deal is a transaction in which one party hands over a specific amount of one currency, and in return receives a quantity of another currency at an exchange-rate value that both parties agree upon. The idea being that one party or another feels that the currency they are holding will be worth more in a future trade.
Spot trading is the most common form of forex trading, and is the focus of most articles discussing forex trading tactics. Larger entities will also deal in the forwards and futures markets as a way to hedge risks. Forwards and futures are trades that involve contracts with settlement dates… not actual currency.
For investors looking to delve into the world of forex trading, it would be wise to note that the spot market has matured on the back of modern technology. Trades are computerized which makes this a very fast-paced venture. Because of the pace and complexity of this market, the savvy forex traders all use some form of software to manage and maintain their transactions.
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