Section II: The Forex Market
What is The Forex Market?
The Forex market is an acronym of The Foreign Exchange Market also called The Currency Market.
What is traded in the Forex Market?
Money, as simple as that!
Currencies are bought and sold freely. This is the simultaneous buying of one currency and the selling of another.
For instance, you have some inside information that leads you to think that the Euro will go up, you want to buy the Euro pair (or EUR/USD). When you buy the EUR/USD pair you are actually buying the EUR and selling the US dollar. When you buy the EUR it is also said that you are “long” the EUR. When you sell the EUR it is also said that you are “short” the EUR.
- The US dollar (USD)
- The Euro (EUR)
- The British Pound (GBP)
- The Swiss Franc (CHF)
- The Canadian dollar (CAD)
- The Australian dollar (AUD)
- The Japanese Yen (JPY)
When did it at all start?
You could not say it all started after a sole event. A series of events happened and in the end it resulted in the Forex market, as we know it today.
It all started when the Bretton Woods agreement was finally abandoned around 1971.
In this agreement, participating countries had their currency pegged to either the gold or the US dollar. By 1973 the most powerful countries around the globe introduced a free exchange rate regime where they let their currencies fluctuate driven by the market or more precisely by the forces of supply and demand. It was then when the Forex market was available to speculate, hedge as well as other reasons.
It was not until 1997 when the Forex market became available to individual investors and traders through online trading capabilities and leverage (margin trading), offering traders around the world great opportunities to profit from the Forex market.
The Forex market is now the most liquid financial market of the world, with a generated volume of nearly 2 trillion US dollars (source: BIS) on a daily basis (more than all other US financial markets combined).
Where do all trades take place?
Unlike other financial markets, there is no physical location where all trades take place in the Forex market. All transactions are conducted via telecommunications (phone, online platforms, etc.) between banks, large institutions, investors, trader, etc. This is called an Over the Counter market or OTC.
Brain Feeder - How do you think the volume of all transactions is measured in the Forex market? Let’s put the Stock market in perspective, all transactions in the NYSE (New York Stock Exchange) are placed through the same NYSE, so they are able to measure how many short and long positions are placed at any point in time. But since there are no physical locations where all transactions are placed in the forex market, how is the volume measured? Or is it even possible to measure the volume of all transactions in the Forex Market?