What is the Forex Market?
The Forex market, also called the foreign exchange market or FX market, is a market where currencies are traded. Currencies are exchanged constantly throughout the world in order to conduct international business and trade, and exchange rates, along with the values of currencies, are always changing. This is what makes the Forex market the world’s largest, most liquid, and most accessible financial market by far, with an average daily trading volume of $5.1 Trillion in April 2016.
How is the Forex Market Different from Other Markets?
The Forex market is unique among financial markets in several ways which make it less structured and more self-regulated. Unlike the stock market, currency trading on the Forex market does not take place on a regulated exchange, and is not governed by any central body. Currency trading is instead conducted ‘over-the-counter’ between traders around the world on computer networks. The FX market operates 24 hours a day, five days a week, and is active across almost every time zone in the world.
What Currencies are Traded on the Forex Market?
A currency’s value is determined by its relation to another currency in a ‘currency pair.’ When you buy a currency pair, you are buying the first listed currency and selling the second one. Seven currency pairs, along with their combinations, make up more than 95% of all Forex trades:
Four “major” pairs:
- EUR/USD (Euro to US Dollar)
- GBP/USD (British Pound to US Dollar)
- USD/JPY (US Dollar to Japanese Yen)
- USD/CHF (US Dollar to Swiss Franc)
Three commodity pairs:
- AUD/USD (Australian Dollar to US Dollar)
- NZD/USD (New Zealand Dollar to US Dollar)
- USD/CAD (US Dollar to Canadian Dollar)
The remaining currency trades are made up of more exotic currencies, such as the Czech koruna or Thai baht.
What is a Currency Carry Trade?
A currency carry trade occurs when an investor sells a currency with a low interest rate, and uses the earnings to purchase another currency with a high interest rate, attempting to benefit from the difference between the rates. This is the most popular type of trade in the Forex market.
What is a Pip?
A Pip, or ‘percentage in point,’ is the smallest trade increment in the Forex Market, equal to 1/100th of 1%.
What are the Benefits of Forex over Stocks?
Forex trading has many benefits over stock trading, including:
- Lower transaction costs.
- Higher liquidity
- No middle men
- Easier access to cash
- Less risk of manipulation due to the massive size of the Forex market
- Typically lower taxes on capital gains
- Less risk of emotional bias
Contact Robovest FX to learn more about automated Forex trading.