The definition of forex, or fx, is an acronym for the word foreign exchange. The full term is foreign exchange money market, or the currency exchange market. Therefore, it is a market for buying and selling currencies.
The forex market is the largest market in the world, and while many people don’t know it, it is far more important than its famous cousin, the stock market. For example, over $3 trillion can be traded on Forex in a single day! That is, a full month of movement on the NYSE.
What is the reason for FOREX’s success?
There are several reasons for his success. First of all, because foreign exchange is an international market, it is not centralized, and it operates 24 hours a day. Since it is opened in Asia, it goes to Europe, then to the United States, and then back to Asia.In fact, the main trading centers are London Stock Exchange, New York Stock Exchange and Tokyo Stock Exchange. Furthermore, the size of this market is so large, so much liquidity is provided, and so many agents are involved (Dellers), there will always be people willing to buy and sell coins.
Most of the players in this market are big banks, governments, multinational corporations…but more and more individuals want to make speculative investments, even if they have to do so through authorized agents.
How does Forex work?
The basic operation is simple: buy and sell operations occur, that is, always buy one currency by selling another (for example, USD-EUR). This price is the dollar-euro exchange rate at that time. Buyers want the exchange rate to rise. If this happens, when you buy and sell in the opposite direction, you will gain from the rising exchange rate.
Let’s look at a very simple practical example
If the EURO-DOLLAR exchange rate (tc) is 1, then 1 US dollar is equal to 1 euro. If I have 10 euros and I sell them for 10 dollars, I now have 10 dollars.
If TC goes to 1.5, that means for every dollar they will give me 1.5 euros. Now I do the opposite. I sell my 10 dollars and I will receive 15 euros. Since I have 10 euros at the beginning, I will win 5 euros.
Of course there are intermediaries, taxes and so on. We ignore this in this example.
FOREX POSSIBILITY OF LOSS OR PROFIT
The potential to generate profit or loss will depend on dealer Detect or predict changes in exchange rates.
These will depend on a variety of reasons, which are exposed to an endless array of macroeconomic variables, not least the monetary policies of the countries involved.
Any news or economic event can be transferred to the forex market affecting any currency (Fundamental analysis). In addition, there are studies on the historical evolution of exchange rates (technical analysis), both analyzes were taken into account to predict motion.
expectations and feelings
In addition, two factors must be added: expectations and sentiment.
expect Create information on the evolution of exchange rates before publishing relevant aspects that will have an impact, such as inflation data, unemployment, interest rates, etc.But investors as a whole can also “Feel” A currency’s positioning in the market, and the exchange rate falls because they think it will fall or rises because they think it will rise.
Small investors act on intuition, experience, and short-term speculation. It is personally impossible for large investors to act rationally and try to calculate the intrinsic value of TC based on a whole bunch of macroeconomic variables and process a lot of information.
Most commonly used currencies in FOREX
Finally, I want to say that among all the currencies in the world, there are only a few that are used the most in the foreign exchange market: US dollar, British pound, euro, Japanese yen, Australian dollar, and Canadian dollar. The most common currency pairs are US dollar/euro, US dollar /JPY and USD/GBP.