How does the Foreign Exchange Market operate?
The foreign exchange market, also known as forex, FX, or currency market is a global decentralized market for trading of currencies and operates on several levels, with the foreign Exchange market being the biggest financial market in the world, and the Australian foreign exchange market ranking seventh in the world. Australia has strong foreign trade links with Asia, United States, New Zealand, Western Europe and the Middle East countries.
The foreign exchange market operates by assisting international trade and investment by enabling currency conversion, for example, by allowing a business in one country, to import goods from another country, using a different currency. The foreign exchange policy in Australia also helps in the advancement of profit and national interest of our country. The policies are directed in a way which would help benefit both investors and people of Australia.
Until recently, the Foreign exchange market had not been accessible for private investors and speculators. High requirements towards the minimum transaction and other restrictions had limited the foreign exchange market to large banks, hedge funds or major currency traders. These days, speculating in foreign currencies is within reach of small private investors.
Trading currencies involves varying degrees of risk just like any other field of speculative trading. Traders buy and sell currencies with currencies being traded between various organisations and banks, enabling businesses to perform transactions outside their local currency. Here, transactions worth more than $4 trillion are being turned around globally each day, as measured by the Bank For International Settlements. With any activity involving investment, the aim is to buy something that is going to increase in value, then sell at a profit, having ascertained that there will be a price change in your favour.
What makes this market unique is it’s operating hours, being open 24 hours a day between 20:00GMT Sunday to 22:00 GMT Friday. During this time, a variety of factors affect each individual currency. All currencies are identified by a three-letter acronym and the exchange rates are always quoted in currency pairs, for eg. Australian dollar is 'AUD'. The first currency named in a currency pair is called the base currency, and the second one is called the counter (or sometimes quote) currency.
For eg. AUD/USD = 0.8713
When you enter a ‘buy’ trade, the exchange rate tells you how much you will pay in the counter currency to buy one unit of the base currency.
So, AUD/USD = 0.8713 means that you would pay 0.8713 American dollars for one Australian dollar. In a ‘sell’ trade, the rate tells you how much of the counter currency you will get for each unit of the base currency.
In this case, AUD/USD = 0.8713 means that you would receive 0.8713 American dollars for one Australian dollar.
When you are considering a trade you would open a BUY...