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What is Forex

The forex market or the Forex Market place is where currencies are traded. Currencies are exchanged or traded in order to facilitate international foreign trade and business between countries. For example if a business man from United States of America wants to buy a German made car, then the businessman would have to first of all change his US Dollars into EUROs, and then use the EUROs to pay for the car that they want to purchase. Also if the US government wants to do business with the Canadian Government, then the US government would have to exchange US Dollars to Canadian Dollars so as to facilitate payment of goods and services.

For this reason where there is need to keep exchanging currencies to facilitate trade the forex market is the largest and most liquid financial market in the world. The daily turnover in the forex market is $7.2 trillion dollars per day while if compared to the New York Stock Exchange which trades about $55 billion per day. This is how big the forex market is.

In the forex market there is no central market where the exchange of currencies is conducted instead Forex is carried out electronically in what is known as the OTC market or Over The Counter market. This means that all currency transactions are carried out through the interbank network and traders place transactions through this network directly from their computers and laptops. Traders from around the world can connect to this interbank network and trade currencies from anywhere in the world.

The forex market is open 24 hours a day, 5 and a half days a week and currencies are traded in the major financial centers of the world, these are London, New York and Tokyo. This means that when the major banks in the US close, then those in Tokyo open, and when those in Tokyo close those in London and Europe are open to facilitate Forex Exchange. This means that forex market is open throughout the day and currency exchange rates are constantly changing and traders can trade at any time of the day.

These three market sessions are the most actively traded market sessions with the New York session being the most active followed by the London Session and then the Tokyo Session.

Forex, Forex, Forex and Currency Market are all synonyms used to refer to the Forex Market.

Three ways to trade the Forex Market

The forex market can be traded in three ways, these are:

Spot Forex - This is the most popular method of trading forex, where traders trade and exchange currencies directly through the interbank electronic network. This method traders exchange one currency directly for another in order to try and make a profit from the transaction. This is the most popular method of trading Forex as it provides the most activity in the Forex Market because spot Forex trading is carried out electronically and it is the method of trading provided by retail forex brokers over their trading platforms.

In Forex, currencies are bought and sold according to the current exchange rate, this exchange rate keeps changing and is determined by supply and demand of a particular currency. Supply and demand of a currency is determined by the interest rate of a particular currency, the political environment of the country of a particular currency as well as the economy of that currency. These factors determine the current exchange rate of a currency as well as the likely future exchange rate of that currency.

Futures - when it comes to Futures the price of futures is based on the price of the currency pair. The futures contracts do not trade the actual price of currencies but instead deal with contracts that represent the currency, the price as well as a future date for the settlement of this contract. This means that the price of a Futures contract is based on the exchange rate that is currently being quoted in the Spot Forex Market. The Futures contract is set to be open up to a certain date when it will get closed at the current market price and the profit generated from the Futures trade will be determined by the current price at the time of closing the contract. If the price is in favor of a trader then the trader makes a profit, if the price has moved against a trader then the trader makes a loss. The futures contract closing date is determined and known even before a trader opens a Futures contract. This method of trading is not popular with retail traders, This method of traders is more popular with institutional investors and hedge funds who use these contracts to Hedge their open trades that they have opened in the Spot Forex Market.

Futures contracts have details which are known as specifications. These specifications are number of units being traded, delivery dates and settlement dates. The futures exchange market place acts as the counterparty to a Futures trader and provides clearance and settlement for the Futures contract.

Futures contracts can also be bought and sold in the futures exchange market before their delivery and settlement dates.

Forwards - these are contracts set and agreed between two parties where the two parties buy and sell a contract between themselves in the OTC market and these two parties are the ones that agree and set the terms of agreement of these forward contracts.

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