What is Forex Trading?

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. EBS and Reuters' dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies.

The foreign exchange market is unique because of the following characteristics:

• Its huge trading volume representing the largest asset class in the world leading to high liquidity;
• Its geographical dispersion;
• Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
• The variety of factors that affect exchange rates;
• The low margins of relative profit compared with other markets of fixed income; and
• The use of leverage to enhance profit and loss margins and with respect to account size.

WHY DO EXCHANGE RATES CHANGE?

Currencies trade on an open market, just like stocks, bonds, computers, cars, and many other goods and services. A currency's value fluctuates as its supply and demand fluctuates, just like anything else.

• An increase in supply or a decrease in demand for a currency can cause the value of that currency to fall.
• A decrease in the supply or an increase in demand for a currency can cause the value of that currency to rise.

A big benefit to forex trading is that you can buy or sell any currency pair, at any time subject to available liquidity. So if you think the Eurozone is going to break apart, you can sell the euro and buy the dollar (sell EUR/USD). If you think the price of gold is going to go up, based on historical correlation patterns you can buy the Australian dollar and sell the U.S. dollar (buy AUD/USD).

This also means that there really is no such thing as a "bear market," in the traditional sense. You can make (or lose) money when the market is trending up and down.

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