The foreign exchange market, also known as Forex, is an over-the-Counter market for the trading of foreign currencies. This market normally determines international exchange rates for each currency involved in the trade. It includes all areas of trading involving the purchase, sale and exchanging of currencies in current or determined prices at present or future dates. The Forex market keeps much longer hours than the traditional stock exchange hours.
A forex trader is someone who either buys or sells currencies from other traders and facilitates the transfer or transaction from one currency to another. An important aspect of the forex market is that the value of a currency never changes. Rather, what happens is that the currency value is determined by supply and demand. So, while one currency is undervalued while the other is overvalued, which side of the table you sit at will determine what the exchange rate is when the value of the currencies are compared.
In order to understand how the foreign exchange markets actually function, it is important to have some basic knowledge of the functions of the foreign currency markets. There are four main components to understanding how currency values move. These are price, supply and demand, information and risk. Of course, all these will be interdependent and none of them can exist without the others.
Price is how buyers and sellers get together to determine the value of a currency. There are numerous factors that can affect the price of currency. These include supply and demand, the current state of the economy and interest rates. If there is high inflation in countries with cheap raw materials and labor, then demand for these commodities goes up and the price of these commodities goes up. Likewise if there are low levels of employment, the cost of living also goes up causing a sharp increase in the demand for foreign currencies and consequently their prices.
Supply is the amount of currency that is being produced or sold by a country. Currency traders always want to buy the most supply of a certain currency. This is to make sure that there is a constant flow of new customers and to keep the prices stable. However, if the supply is too great, then the foreign currencies are overvalued and forex prices go down. Conversely, if there is not enough supply, then the currencies are undervalued and forex markets stay open.
The demand and supply forces determine the exchange rate between one currency and another. For example, if there are many buyers of a particular currency, then the exchange rate between that currency and another will tend to be favorable. Conversely, if the supply is low and there is not enough demand, then the forex markets stay open and the prices go up. In this article case, a trader could make a profit by buying a currency and selling it at a higher price while offering a lower price to offset his losses in the corresponding currency.
Forex markets are open every day throughout the world. Traders participate by buying and selling currencies based on the predictions of the forex exchange rate. They do so both physically and electronically. Both methods require information to be provided to and monitored by forex trading systems. Since all these transactions are carried out in real time, the accuracy of the results are almost instantaneous and can be used to make financial decisions such as which currencies to buy at present and which ones should be sold off soon.
To participate in the forex trading markets, traders need to have a certain level of leverage. Leverage is the ability to increase the money one has in their account without borrowing it from an outside source. Traders may also borrow other people's money or use their own personal funds as collateral for leverages of up to 100%. This form of leverage is available only to experienced traders who learn to manipulate the leverage in order to gain more profits and in turn may leave other traders with less profits in their hands.