What Exactly is the Forex Trading and How it Works?

The foreign exchange market is the marketplace, a point-of-meeting where the, you guessed, foreign currencies are traded and exchanged.

Currencies are essential to both business and individuals from across the globe, whether they acknowledge that or not.

This is all due to a fact that different national currencies (such as Dollar, or Euro, Japanese Yen or Polish Zloty) need to be exchanged in order for the cross-border trade and business relations to exist. So if you are living in America. and want to buy wine from France, then either you personally or the middlemen firm that you buy it from just have to check out with the French producer not in US dollars, but in their (supra) national currency – Euro. Or if you pay these French people with dollars, eventually they will have to convert it to their currency at the end of the day. This means that the U.S. importer is poised to exchange the equivalent face value of U.S. dollars (USD) into euros. The same situation exists for traveling. A French tourist in Egypt can’t pay in euros to see the pyramids because the Egypt has its own internal currency – the Egyptian Pound. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.

Ultimately the need to exchange currencies is the first and foremost reason why the forex market is the biggest, most volatile financial market in the world. It dwarfs other markets in size, even the stock exchange or bonds markets, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of August 2015 it is reported that the forex market traded in excess of U.S. $4.9 trillion per day). This whopping figure amounts to half the US yearly national budget – in just 1 day!)

Another interesting fact about this cross-border market is that there is no universal, centralized marketplace for foreign exchange.

Instead of this, the Forex trading happens on an electronic, over-the-counter (OTC basis. That makes all transactions occur via computer networks between traders across the globe, as opposed to just some single centralized exchange.

The Forex market works for 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney – across almost every time zone. 

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