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Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa.
The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.
The foreign exchange market, by its very nature, is the world’s largest trading market by volume.
According to the Bank of International Settlements (BIS) latest survey, the Forex market now turns over in excess of $5 trillion every day, with the most exchanges occurring between the US Dollar and the Euro (EUR/USD), followed by the US Dollar and the Japanese Yen (USD/JPY), then the US Dollar and Pound Sterling (GBP/USD).
Ultimately, it is the very exchanging between currencies which causes a country’s currency to fluctuate in value in relation to another currency – this is known as the exchange rate.
With regards to freely floating currencies, this is determined by supply and demand, such as imports and exports, and currency traders, such as banks and hedge funds.
Emphasis on Retail Trading for Forex
Trading the forex market for the purpose of financial gain was once the exclusive realm of financial institutions.
But thanks to the invention of the internet and advances in financial technology from the 1990’s, almost anyone can now start trading this huge market.
All one needs is a computer, an internet connection, and an account with a forex broker.
Of course, before one starts to trade currencies, a certain level of knowledge and practice is essential.
Once can gain some practice using demonstration accounts, i.e. place trades using demo money, before moving on to some real trading after attaining confidence.
The main two fields of trading are known as technical analysis and fundamental analysis.
Technical analysis refers to using mathematical tools and certain patterns to help decide whether to buy or sell a currency pair, and fundamental analysis refers to gauging the national and international events which may potentially affect a country’s currency value.