How the Forex Currency Market Works

Forex is an international currency instrument that allows participants to earn on the difference in the value of different currencies in relation to each other. In fact, it is the largest and most widespread financial instrument that makes it possible to achieve the growth of financial investments. The principle of Forex is the simplest – buy cheaper, sell more expensive.

The history of the foreign exchange market

The emergence of a free market for the conversion of foreign currencies is associated with the abolition of the gold standard for the dollar. Gold has ceased to provide the value of the dollar, and the American currency itself has ceased to provide the value of the currencies of the non-communist bloc. Thus, in 1971, the system of stable exchange rates was destroyed.

Since 1976, many countries have refused to link the value of their currency to gold, which ensured the emergence of a free exchange rate. With the development of Internet technologies and taking into account the digitalization of the main life processes, the market currency exchange system has become available to ordinary users. Taking into account the interest in passive profitability, the Forex trading system began to develop actively.

Now it is represented by numerous companies that provide brokerage services. Brokers receive capital from the participant. At their discretion, they use it to perform transactions for the purchase and sale of currency. If successful, the final trader receives a profit, and the broker receives a fee. In case of failure, the trader’s funds are burned. The risk of working in the foreign exchange market is significant. Before starting work, it is necessary to weigh everything clearly and determine the ratio of risk and possible dividends.

The main essence of the Forex currency market

The main essence of working in the Forex market is an offer to purchase a currency product that has a significant demand, finding a convenient moment to sell (exchange) for another currency. The ratio of counterparty currencies is called a currency pair.

A participant in the buying and selling process is called a trader. He acquires a foreign currency only when he is convinced, based on forecasts, of an increase in its value. If the forecasts are justified, the trader will receive the desired profit.

Forex Terminology

A Forex trader must necessarily know a number of terminological basics:

  1. Liquidity is the property of market assets to be sold close to market value.
  2. The trading platform is the electronic system itself, through which trading operations of participants are carried out.
  3. Lot – the subject of the trader’s purchase.
  4. PIPS is the minimum price movement on Forex above or below.
  5. Margin is the profit received as a result of the transaction.
  6. Leverage is a service provided by stock exchange brokers for debt investment of securities or currency to a trader for the latter to conclude more profitable transactions than those that he could conclude with only his own funds.

These terms are constantly used by market participants. Knowledge of terminology is mandatory for contacting participants.

Factors that affect the value of the purchased and sold currency

Experts have identified four main factors that affect the value of acquired market assets. These include:

  1. Economic factors.
  2. Political factors.
  3. Economists’ expectations and various rumors spread by currency speculators.
  4. Economists’ expectations and various rumors spread by currency speculators.

Economic factors can be called the inflation rate, the size of the securities market, the key rate, and so on. Political factors are the relations of countries that have a direct bearing on the currency value in the free market. For example, the imposition of sanctions or the conclusion of a major trade agreement. Often, market freedom is based on gossip and rumors about the likely course of market development. These rumors are spread by speculators in order to get the desired sales rate for their goods.

The exchange’s work schedule

The start of trading is announced on Monday morning and they end on Friday evening. Taking into account time zones, the trading platform works without technical interruptions throughout the working week.

Published: 23 July, 2021

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