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The Foreign Exchange market, also referred to as Forex, is the largest financial market in the world, with a volume of about $4 trillion a day. It was established in 1971 with the abolishment of fixed currency exchanges. Forex daily volume is 60 times bigger than New York Stock Exchange!
The foreign exchange market is unique because of
- its huge trading volume representing the largest asset class in the world leading to high liquidity;
- its geographical dispersion;
- its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMTon Sunday until 22:00 GMT Friday;
- the variety of factors that affect exchange rate;
- the low margins of relative profit compared with other markets of fixed income; and
- the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition.
What is traded on the Foreign Exchange? The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Buying a currency is like buying a share in a particular country. EXAMPLE: When you buy, say, Australian Dollars against American Dollars, you are in effect buying a share in the Australian economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Australian economy, compared to the USA economy.
Unlike other financial markets, the Forex market has neither a physical location nor a central exchange. Forex is an "Interbank" market, due to the fact that the entire market is run electronically, within a network of about 5000 trading institutions such as international banks, central government banks(like the US Federal Reserve), and commercial companies and brokers.
The 3 major trading centers are located in New York, Tokyo and London (being London the biggest one), following by Hong Kong, Singapore, Paris, Frankfurt, and Sydney.
The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, including the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
Since Forex market operates 24 hours a day, unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
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