What is Foreign Exchange?
What is Foreign Exchange?
Forex, or Foreign Exchange (FX Exchange), is the simultaneous exchange of one country’s currency for that of another. Over the last three decades the foreign exchange market has become the world’s largest financial market, with over $1.4 trillion USD traded daily. By comparison, the NYSE daily volume averages $25 billion per day. There is no central exchange of physical location, and trading takes place over-the-counter, 24 hours a day.
What is foreign exchange (FX exchange) nowadays? Until recently, the foreign exchange market wasn’t for the average trader or individual speculator. With the large minimum transaction sizes and often stringent financial requirements, banks, hedge funds, major currency dealers and the occasional high net-worth individual speculator were the principal participants. These large traders were able to take advantage of the many benefits offered by the forex market, including fantastic liquidity and the strong trending nature of the world’s primary currency exchange rates.
What is the foreign exchange market for? The investor or trader is looking to purchase or sell one currency for another with the hope of making a profit when the value of the currencies change in favor of the investor, whether from market news or events that take place in the world.
Trading, or speculation, makes up 95% of the daily volume in the FX exchange. The other 5% of daily volume consists of governments and commercial companies converting one currency into another from buying and selling goods and services.
The most commonly traded currencies are referred to as the ‘Majors’:
- US Dollar (USD)
- Japanese Yen (JPY)
- Euro (EUR)
- British Pound (GBP)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- Swiss Franc (CHF)
The most commonly traded currency pairs are:
- US Dollar and the Japanese Yen (USD/JPY)
- Euro and US Dollar (EUR/USD)
- US Dollar and Swiss Franc (USD/CHF)