The Forex Market
Learn more about the world’s largest and most liquid market
What is the foreign exchange market?
The Foreign Exchange Market (also called Forex, FX or currency market) functions as an over-the-counter (OTC) market for the buying, selling and exchanging of currencies. It’s the world’s largest and most liquid market, with over $5 trillion in trading per day on average.
how are currencies traded in the Foreign exchange Market?
Currencies are always traded- and priced- in pairs. Rather than setting an absolute value for each currency, the Forex market instead determines a currency’s value in relative terms; that is, by setting the market price of one currency if paid for with another currency.
Every Forex trade involves a currency pair, such as EUR/USD, or USD/CAD. Investors, whether individuals, corporations, or countries, can choose to buy and sell currency pairs in the Forex market, aiming to make a trade profit based on an expectation that the value of one currency will increase relative to another.
How do investors make money trading money?
Investors buy and sell currency pairs based on an expectation that the value of one currency will increase relative to another. These traders rely heavily on technical analysis and advanced strategies to find profitable currency trade opportunities.
In a typical trade, you might see a EUR/USD currency pair quoted at 1.1254. In this pair, the base currency is the euro and the quote currency is the USD. The base currency is always worth one unit, and the quote currency is the amount of currency that one base currency unit can buy. In the above example, 1 Euro can buy 1.1254 USD. So a Forex trader would make money on this pair if the quoted currency value appreciates, or if the base currency depreciates.
How do national interest rates affect a currencies value?
A currency’s exchange rate with other currencies is the result of many interrelated factors that determine a country’s overall financial standing relative to other countries. One of the key factors affecting a currency’s value is that country’s national interest rate.
Generally speaking, higher interest rates in a country will increase their currency value, relative to other nations with lower interest rates. Higher interest rates tend to attract foreign investment which causes in increase in the demand for the home country’s currency. The opposite effect can be observed as well: a country with lower interest rates is less attractive to foreign investment, which will tend to decrease that country’s relative currency value.
This is a simplified explanation of the relationship between a country’s interest rates and their currency value. There are myriad other factors that impact relative currency value, such as a country’s political and economic stability, import/export balance, debt, and the global demand for that country’s goods and services.
These factors and many others are key markers that market-savvy forex traders and analysts assess in order to discover new profitable currency trading opportunities.