The Foreign exchange market is an over-the-Counter or global market for the trading of foreign currencies. This market effectively determines international exchange rates for each currency. It incorporates all aspects of trading, buying and selling currencies in current or decided prices. In recent years the Forex has become one of the largest and most liquid financial markets. This market continues to develop on a fast pace due to its global nature.
Trading in the forex requires an adequate knowledge of foreign currency movements as well as Forex jargon such as pips, lot sizes, leveraged, stop loss and leverage. The Forex traders use sophisticated techniques to make profit. They use Forex charts and graphs, price action, technical analysis, pivot points, Fibonacci levels and other tools. All these factors combined are supposed to make profit in any Forex trading. A trader can buy/sell a particular currency pair at a pre-determined price and also make a profit by changing the direction of the market. There are various ways in which this can happen.
Forex markets can be separated into three major categories: the interbank market, the direct market and the futures and options markets. Each of the three major categories of forex has a specific function. While trading in the interbank market one can buy/sell currencies of different banks and institutions. This is an easier way to trade. In interbank market one can also buy/sell foreign currencies of single banks and organizations. The direct Forex market involves trading in one currency and its exchange rate with another currency.
The main Forex markets include: New York, London, Tokyo, Singapore, New York, Frankfurt, Sydney, Chicago, Philadelphia, Tokyo, Germany, Hong Kong, Barcelona, Buenos Aires, Beijing, Sydney, Mumbai, Taipei, Singapore, Brazil, Argentina, India, Russia, Germany, Swiss, Sweden and others. In the direct forex market, the trader trades currencies directly against another currency in the same market. These are the major countries which have large volume of trade in forex. These currencies are usually the leading currencies of their respective countries. The futures and options forex markets are similar to the forex markets, except that instead of trading one currency against another, traders can speculate on future prices of specific currencies.
Some important types of forex trading are futures, spot market, forward market and swaptions. Futures forex trading involves the purchase of a certain quantity of goods or services at a fixed price in the future. The buyer of the futures contract, also known as the speculator will pay for the goods or services when they are actually produced. In the spot market, a certain quantity of an asset is being traded for a certain amount of time at an agreed date and time, and this happens in the forward market.
On the other hand, the swaps forex contracts allow the holder of the swap to shift his currency position into another position. For example, the holder of the swap can swap the EUR/USD (the base currency) for the USD (the forward currency). This can be leveraged to obtain higher levels of foreign exchange trading. A swaption is basically a financial transaction in which a particular country exchanges one currency for another. A forward is a certain level of foreign exchange interest rate.