What Is The Forex Market And How Does It Work?

The Forex market is the largest in the world. Each country, in general, manages its monetary policy. Depending on how your economy flows, a national currency will have a certain value with respect to the rest of the world's currencies . When people travel or when companies export products, it will normally be necessary to exchange value between the different national monetary assets, however, price variations between currencies are not exclusively due to commercial operations . This market moves around 5 billion dollars every day in volume of transactions.

What is Forex?

Forex is the name given to the currency market. It is short for “Foreign Exchange”. The forex market works in a decentralized way all over the world. It was born so that the international monetary flow derived from trade could be carried out in a simple way .

It is currently the financial market that moves the most capital every day. Its market volume is so large that it exceeds that of all other financial markets combined. The main Forex trading exchanges are London, New York and Tokyo. It must be borne in mind that being a decentralized market there is no single quote value, something similar to what happens with cryptocurrencies where the price can vary slightly depending on the broker or exchange with which you work.

Forex Market Features

The Forex market has a series of peculiarities that make it unique. The main ones would be:
-The enormous volume of transactions , which makes it a highly liquid market.
-Being decentralized , global and with great geographical diversity.
-Although it is open 24 hours a day, it closes on weekends.

What is a spread?

The spread is the name given to the difference between the purchase price and the sale price of a certain currency pair. Different currencies are traded in pairs. This means that for example, in the EUR/USD pair we are trading with the value of the Euro against the US Dollar . If the purchase value of the highest bid is 1.20, for example, and the sale value of the lowest priced offer is 1.23, the spread would have a value of 3. Normally 3 is the maximum value which usually has the spread. The most traded currency pairs are EUR/USD, USD/JPY, and GBP/USD.

Forex Market Players

The forex market has investors of all kinds and from all parts of the world. Everyone has their tools and their way of seeing the market. With proper capital management and the right knowledge, you can earn a lot of money , but just like in other financial markets, you can also lose. Let's remember that in the stock markets, for someone to earn money, someone else has to lose it . Normally it is said that 80% of people lose money trading, that means that the remaining 20% ​​keep the money of the losing players.

small investors

Brokers are financial intermediaries that offer the possibility of trading between currencies to small investors. Simply by opening an account and introducing capital with a series of prerequisites, anyone can operate in this market. Operators or individual traders or those who work through associations or investment managers seek through speculation a profit with price movements between different currencies.

Trading companies

Companies that work with international providers are an important long-term asset of the forex market. Although they are not dedicated to the financial sector, they will need to make currency exchanges for their commercial operations. In the short term, the effects may not be noticeable, but in the long term they are reflected with greater importance. In the case of currencies from small countries or countries with little market volume, the entry of a transnational or multinational company can lead to a sudden change in prices.

Financial institutions

Long ago, financial institutions played a very important role in the forex market. For some time now, much of this business has moved to systems like Bloomberg. However, these institutions continue to have the ability to participate in the market either for speculative purposes , representing a client, or seeking coverage for their funds.

In order for a company to make a purchase of shares of a foreign company, for example, it first needs to make a currency exchange in the forex market, so they continue to be very active in the market despite having set aside the collection of fees. for participating in transactions between trading parties.

central banks

Central banks as issuers of the national currency play a very important role in the forex market. The simple expectation of a possible action by one of these institutions can significantly change the price of a currency. They can generate currency or limit their reserves to control the money supply and cause inflation or deflation.

Remember that the currencies of the forex market are fiat currencies. Since there is no maximum limit on the number of Dollars or Euros, for example, that can be created, in the end it will be the central banks that try to maintain the price according to their own interests. however, central banks do not always have control over the market. Sometimes the market can turn against a central bank in cases of an extreme political or economic situation.

Investment instruments in the Forex market

When operating in the forex market you can use a series of financial instruments:

- Cash operations . They are purchase and sale operations in which the transaction is carried out in two business days or less.
-Term operations . They are those purchase and sale operations where the listing price is established at the time of the agreement but the delivery is made at a later time. The delivery time is also previously set in the exchange contract itself.
-Derivatives: Swap and futures . In this type of operation, what is purchased is a contract by which the parties agree to carry out the exchange on a certain date. Using these instruments you can trade short and earn returns even when the market is down.

What factors move prices?

Throughout the time the forex market has existed, numerous economic theories have been created about the movement and possible analysis of prices. In general it can be distinguished that the political, economic and psychological aspects are the most important.

When situations of deficit, inflation, interest rate fluctuations, high unemployment rate , etc. occur, there are also significant changes in the valuation of a currency by investors. On the other hand, the psychology of the market also plays a very important role. Market psychology is understood as the set of news or rumors that affect the subjective perception of investors . We live in an era where any piece of information goes viral in a matter of minutes. For this reason, any news, even if it is false, can generate sudden movements in the prices of an asset, creating fear or enthusiasm in investors and modifying the natural or rational feeling of the market.

In conclusion, we must add that the Forex market, being the most liquid market in the world, is also the most suitable for novice investors and people who are learning to trade . If after reading this article you want to enter the market, remember to only do so with money that you can afford to lose and first acquire proper training.

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