What is Forex?

What is Forex? Strictly speaking Forex is an abbreviation for Foreign Exchange Market. However, the term also refers to trading in currency markets by those hedging currency risks for international transactions and those speculating in search of profits from market volatility.  What is Forex for someone hedging risk is a onetime transaction for each commercial contract. What is Forex for the currency speculator is a lifetime occupation following and predicting price changes and gaining profits. There are three major Forex markets, London, New York, and Tokyo. Forex trading is available around the clock on business days although individual markets are only open during business hours in each city. Those trading Forex with candlesticks or other technical trading systems can move in and out of trades around the clock, so long as their stamina and supplies of coffee hold out.

Forex Markets

What is Forex in the broader sense? It is the system of markets that allow for the exchange of US dollars for Yen, British Pounds for Euros, and the rest. Currencies are traded in pairs. That is to say one can buy one currency with another or sell one currency for another. There are a set of so called major currencies that are traded in high volume and many minor currencies that trade in small volume and occasionally. The US dollar, USD, is part of 85% of all currency trades. The total daily volume of currency trades runs to about $4 Trillion calculated in US dollars. What is Forex for nations in general is the broad based institution that determines foreign currency exchange rates throughout the world.

Trading Foreign Currencies

What is Forex for those who need to convert currencies for business purposes and speculators is an organized system for trading one currency for another. For the company that needs to convert Yen to dollars the issue is finding the best price. For speculators the issue is often finding the most volatile currency in order to increase the opportunity for profit. Currencies can be traded directly or using the options market. Forex currency rates can be very volatile which lends to profit potential but also risk. A currency trader can purchase calls or puts on one currency with another. This gives him or her a degree of leverage and limits loss to the price of the options contract. A call gives the trader the right to purchase one currency with another at a specified price, the strike price, no matter how high the price goes. A put gives a trader the right to sell one currency for another at the strike price no matter how low the price goes. In both cases the trader is under no obligation to execute the contract and will only do so if doing so is profitable. In fact, traders often exit an options contract when doing so leads to a profit or limits loss. There is no obligation to hold the contract until expiration so long as the market is sufficiently liquid to allow for making the opposite trade.