How Does the Forex Markets Work?
The foreign exchange or forex market is an over-the-counter decentralized market for the trade of foreign currencies. This marketplace determines international exchange rates for each currency engaged in the trade. It comprises all areas of trading: buying, selling and trading currencies in current or predicted values. It also includes the financial risks involved in Forex trading. Understanding how Forex works will help you make better decisions about your trades.
Forex is largely an informal market. Unlike stock exchanges where there are usually predetermined times when trades happen, Forex occurs on an as-is basis, meaning that whatever the market sees is what it will trade as. A Forex trader may buy one currency and then immediately sell another. Unlike shares, the values of Forex contracts never go down and up. You can buy or sell foreign currency 24 hours per day.
Interest Rate Risk. One of the biggest factors determining the value of the foreign exchange market, especially interest rate risk, is the interest rate. Whenever the value of a currency is predicted to rise, it naturally increases in value. However, interest rate risks are kept to a minimum when the value of the currency in question is predicted to fall.
Forex Markets. Different countries and banks set their own interest rates and foreign currencies can be traded between them. Some of the most commonly traded currencies are U.S. dollars (USD), European Euros (EUR), Japanese Yen (JPY), Swiss Franc (CHF) and Australian Dollar (AUD). There are also other currencies being traded on the forex markets including New Zealand Dollar (NZD), Singapore Dollars (sgD), Chinese Yuan (CZ) and South African Krugerrand (SDR).
Foreign Trade. Forex is not just about trading one another’s currency; it is also about trading one another’s goods and services as well. In the forex markets, trade is made between buyers and sellers for the sole purpose of exchanging one currency for another. This is also known as foreign exchange trading. For instance, if you need some electronics but have no money, you can sell your old cell phone for a different model which is available at a certain store where you can sell your goods for foreign exchange.
The Foreign Exchange Market functions similarly to the stock markets however instead of shares being bought and sold from people like you and me, foreign exchange markets work with physical commodities such as currency, bonds, stocks and indices. When you want to purchase something, all you need to do is wait for the right time to sell that item so you can earn the amount you need to survive until you have paid for it. The same holds true if you want to sell something. The best way to learn more about how the foreign exchange markets work is to start with an online forex trading course. If you want to know more on how the Forex markets work, I recommend that you check out my resource box below for a free Forex trading guide that will surely increase your profits.