A Simple Explanation of Forex Transactions
All Forex transactions usually involve two currencies, for instance the most traded pair in the world is the EUR/USD (Euro against the Dollars). When a traveler or a business owner takes a trip from Germany to the United States of America, he or she needs to make a Forex transaction by converting his or her Euro to U.S. Dollars.
When this is done, the foreign exchange rate between the two currencies determines how many Dollars the person will receive for its Euro. The Forex exchange rate fluctuates continuously, and that fluctuation is the very essence of currency trading.
A Forex transaction also includes everything from the basic currency transactions often made by tourists when travelling, to the multi-billion dollar transactions executed by financial institutions, governments and large corporations.
What Is the Forex Market?
The Forex market’s exchange system as we know it today was formed in early 1970’s when the Bretton Woods agreement failed. This was a fixed exchange rate system, where currencies were pegged against an artificial exchange rate. The Bretton Woods agreement and other attempts to fix the currency exchange rate failed.
Nowadays, the exchange rates of the Forex market is floating free with market forces affecting the prices of currencies higher or lower. Also, after 1970 the US Dollar was established as the global reserve currency. The USD is backed by the US Federal Reserve and is most held by banks in the world, next to their national currency.
The Forex Market Is Open 24 Hours and 5 Days a Week
From all the different types of financial markets, the Forex market is the largest financial market in the world with over $5.3 trillion currencies traded daily. It is a financial market that never sleeps, trading for 24 hours, 5 days a week.
Unlike the stock market there is no centralized trading exchange like the New York Stock exchange or the Japan Exchange group. Therefore, all the Forex trading is done online through electronic communication networks in various markets around the world. This is different when trading stocks. Here, a trader needs to pay attention to the specific working hours of a particular exchange. For example, if a trader lives in Indonesia but is trading US Stocks on the New York Stock Exchange (NYSE), then he need to take into consideration the time zone difference and can execute his trading activities only once the NYSE opens.
Therefore, it is more practical and easier to trade Forex, with a market that is open 24 hours and 5 days a week.