Forex Meaning

Mike Anyayahan By Mike Anyayahan, 12th Feb 2014 | Follow this author | RSS Feed
Posted in Wikinut>Business>Investment

Forex means foreign exchange. It is defined as an exchange of one foreign currency to another. The word has a general meaning which covers topics such as currency rates, money changers, and currency trading.

What is Forex?

Forex means foreign exchange. It is defined as an exchange of one foreign currency to another. The word has a general meaning which covers topics such as currency rates, money changers, and currency trading.

Though this term has several connotations, most people nowadays understand the term to mean currency trading or the business of buying and selling of foreign currencies as a form of investment which works like stock trading. Such a meaning always needs to be defined because its technicalities gradually become more complex. Whenever confronted with this term, it is logical to understand its meaning as a process rather than a place or an event.

Forex is the process of trading foreign currencies for the purpose of short term gains and risk management. It is also called fx trading. In comparison with stock trading, they are similar in the sense that investors may profit from price appreciation, and are different in the sense that stock trading is done in a stock exchange instead of being transacted anywhere and any time online.

Traditionally, currencies were only used to buy goods and services. Nowadays, they are also being bought and sold. In order to purchase a foreign currency or a currency from another country, one has to pay using his country's currency. The purchase of one currency to be paid with another currency is an exchange of foreign currencies. This transaction is now popularly known as foreign exchange.

Forex is a dynamic and an active global market of traded foreign currencies. It is the largest market in the world. With trillion dollars of trading volume, it is considered the most efficient market in the world where nobody can ever monopolize.

Participants in this market do not necessarily trade for profit. There are market players who trade in order to hedge their funds against risk. Some just trade out of their needs of foreign currencies for many reasons. But most participants and market players trade to make money. Commonly known market players are: banks, arbitrageurs, multi-national companies, brokers, hedgers, hedge fund traders, and the fast growing retail traders composed of individual fx traders.

Forex is open 24 hours. It is traded in different time zones around the world. It only closes on Saturdays and Sundays of the last market to close such as the US market or Saturdays in the US. It opens on Mondays of the first market to open such as New Zealand and Australian markets or Mondays in New Zealand and Australia.

In this 24-hour-market, the most heavily traded currencies are: the Euro, Sterling Pound, Japanese Yen, Australian Dollar, and Swiss Franc, all against the US dollar. To buy such currencies is to automatically sell the US dollar and vice versa. Other currencies which are not pegged to the US dollar are called cross currencies or currency crosses.

Forex offers opportunities for traders to earn from price fluctuation. A trader can buy a currency at a lower price and and sell it at a higher price. The price of a currency, or a currency rate, is determined by supply and demand principle. Moreover, prices or rates can change dramatically in just a matter of minutes. Therefore, an opportunity to earn quickly is what makes this market the most liquid market of all since there are always available buyers and sellers.

However, this market is like a double-edged sword. If it offers opportunities to earn, it also introduces risk of possible losses. This means that the higher the earnings one may get here, the higher the risk that he may lose the same.

Forex, therefore, is an art of risk management to be followed in order to prevent a trader from incurring huge losses, and to protect a profit from unexpected turn. It is an art of making money out of money.

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