Foreign Exchange Definition
foreign exchange definition
Foreign Exchange How the Market Works
The Foreign Exchange Market (Forex or Foreign Exchange in Anglo-American) is the market where currencies are traded against each other. It is the largest financial market in the world with daily trading volumes exceeding 1500 billion dollars!
Unlike the stock market (or markets or future options on currencies), the foreign exchange market there is no centralized quotation (fixing) but only transactions over the counter (OTC, Over The Counter in the stock market jargon). This means that operators come into contact with each other individually, by telephone or computer networks.
The major stock exchange is currently in London with around 30% market share New York with 20%, with 12% Tokyo, Zurich, Frankfurt, Hong Kong and Singapore, with about 7% each, followed by Paris and Sydney with 3% each. The market works 24/24 and then five days a week from Sydney on Monday morning (actually on Sunday afternoon for us) until Friday afternoon (late afternoon in New York). Thus investors (no matter where he lives) in contact with a broker of exchange on each of these markets can be active 24/24!
Views trading volumes, is a highly competitive market because any operator nor any central bank can hope to change through interventions on exchange rates of currencies like the U.S. dollar, the euro, the yen or Swiss franc (see Article on the falling dollar). By cons through their public statements, policy or monetary course exercise an influence (eg the head of the Fed’s Alan Greenspan or the U.S. Treasury Secretary).
The main activity consists in exchanging currencies against the U.S. dollar (euro-dollar, yen-dollar). Operators therefore choose a currency pair on which they will work, for example USD / EUR. The listing will always note indicating the course of buying and the selling rate. For example: USD / EUR = 0.7563 / 0.7567
This means that you can purchase $ 1 to 0.7563 euro or sell 1 Euro 0.7567 to U.S. dollar. A New York lots are $ 100 000 and there is a leverage that can be (depending on the broker) for example 1%. Only $ 1000 will suffice in this case an investor to act on $ 100 000. Suppose you think the dollar is undervalued against the euro. You go and buy dollars because you think its value will increase, you simultaneously sell euros (you play the pair USD / EUR).
Imagine that you had a good intuition FOREX or foreign exchange market and the USD / CDN rises to 0.7597 / 99. Now you can sell a dollar for 0.7599 or buy one dollar for 0.7597. You bought dollars, you are “long” in dollars, you have simultaneously sold the euro, you are “short” euro. To make your profit you must now reverse the transaction (closing your position in stock market jargon): Sell your dollars and buy back your euro.
You sell your share of $ 100 000 to 75 970 euros when you had bought 75 630 euros, a gain of 340 euros. Dollars that makes a profit (EUR 340 / 0.7597) $ 447. For $ 1,000 initial investment, you earn $ 447 or a return on investment (ROI, Return On Investment) of almost 45%!
Of course, the lever mechanism can save a lot, but losing too much if your intuition was wrong (it multiplies the losses as much as winnings). The foreign exchange market is highly speculative, of course.
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