Forex is an acronym of Foreign Exchange, it is the world’s largest market with an estimated volume of $4 trillion, which in the context of the world’s largest economy of the United States being $14 trillion a year is really quite staggering. The forex market is very different to stocks and shares, it has no central registry, rather it is a network of banks all around the world.
How Does Forex Work?
On a basic level, forex works by allowing you to change one country’s currency to another, say you live in the US and want to go sightseeing in Japan on your holidays, you’d want to go to a foreign exchange broker facility to change your US Dollars for Japanese YENs, the value of which will have been established through the forex interbank market. Forex currencies are traded in pairs, meaning that if the US dollar is moving up in value, the YEN will be falling by exactly the same amount, it’s just like an old fashioned scale where when you add something to one side the other side will go up. Because of this you can either buy or sell a forex pair, there is no difference in the process in practice.
What Moves The Price Of A Forex Pair?
There are virtually endless reasons of why a currency’s value might change, central banks can increase the supply of money as with quantitative easing, it basically means there is more money in the economy for the same amount of goods and services translating into a lower valued currency. There is a lot of speculation on the forex market and the perception of the strength of a currency by these speculators will have a direct impact on it’s value as these speculative transitions are executed. The price is ultimately decided by supply and demand just as it is with any other product that you would want to sell or buy, if there are more products to sell than people want the price will go down, conversely if there are less products than people want to buy then the price will go up and forex currencies are no different in this respect. The reason it is so difficult to establish where the price of a pair might be heading is because there are so many participants, large conglomerate international companies that buy and sell goods and pay their staff in different countries. There are now since around 2001 retail traders that participate in the market from the comfort of their own home, and it can be a very attractive proposition, it takes the same amount of skill to make a tenner as it does a thousand pounds, it is a level playing field, all participants have the same facilities and are quoted exactly the same price all around the world at exactly the same time.