Forex is an inter-bank market that took shape in 1971 when global trade shifted from fixed exchange rates to floating ones. This is a set of transactions among forex market agents involving exchange of specified sums of money in a currency unit of any given nation for currency of another nation at an agreed rate as of any specified date. During exchange, the exchange rate of one currency to another currency is determined simply: by supply and demand – exchange to which both parties agree.
Forex is said to be "the fairest market on earth" by some because of its sheer size, and number of participants. No one player, not even the central bank of a particular country, can completely control the market direction.
The forex market is not controlled by a centralized exchange as is with stock and futures markets. The forex market is an Over the Counter (OTC) market as transactions are made via the internet from many different locations 24 hours a day, 5 days a week.
The forex market is called an 'Interbank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing due to the popularity and availability afforded by internet trading, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.
A true 24-hour market, forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night. The market is open 24/5.
The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar.
Margin is essentially collateral for a position. If the market moves against a customer's position, additional funds will be requested through a "margin call." If there are insufficient available funds, immediately the customer's open positions will be closed out.
Clients can buy or sell a financial product with substantially less money than the actual full market value of that financial product. A position in a contract with high gearing or leverage stands to make or lose a large amount from a small percentage movement in the underlying instrument.
If you are buying some currency, you are opening a 'long' position, if selling - 'short'. For example, if you buy 1 lot of EUR/USD, it means you open long position for 100,000 of EUR against USD. And of you sell 10 lots of USD/CAD that means you open short position for 1 mln of USD versus CAD.
Currency prices (exchange rates) are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the forex market makes it impossible for any one entity to "drive" the market for any length of time.
The most common risk management tools in forex trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order sets a particular position to be automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor's position. The liquidity of the forex market ensures that limit order and stop loss orders can be easily executed.
Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analysis to identify trading opportunities, whereas fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumour. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.