Investing in Forex
You often hear about it, but not everyone knows what it really is. Of course, we are talking about Forex, the most important foreign exchange market in the world. What is its history and specificity? We’ll try to explain it all in the following article.
Characteristics of the Forex market
Forex is the most floating and at the same time the most important global market, the global market where the whole global economy and speculation meet. It has no physical location, and the whole mechanism of its functioning is carried out through computer networks. Forex is also called the FX market, Foreign Exchange Market or simply the currency market. It is a traders’ market, i.e. a market that brings together individuals and entities that make short-term market transactions using all available financial instruments.
How does Forex work?
As a virtual electronic market, it is open 5 days a week, from Monday to Friday, when it operates continuously for 24 hours. During its daily operation, there are 3 so-called trading sessions each day it opens. The sessions, generally speaking, are all transactions of buying and selling financial instruments registered on the market in order to achieve financial benefits caused by the change in prices of these instruments.
In the case of the Forex market, these sessions are the buy and sell transactions of so-called CFDs (contract for difference) for currency pairs, indices or goods or shares. Each trading session lasts 8 hours – in Asia the time is from 00:00 to 08:00 Universal Time (GMT), in London the session starts at 8:00 a.m. and lasts until 4:00 p.m. GMT, and the whole session ends in North America from 4:00 p.m. to 24:00 p.m. GMT.
The beginnings and history of the Forex market
The Forex market has emerged quite spontaneously as a result of technological developments. The whole thing was mainly influenced by 1971 and the decision of the then-president of the United States, Richard Nixon, to suspend the exchange of the dollar into gold. This was one of the most important moments that influenced the dependence of currencies converted to gold. It was the beginning of his independence. This decision gave rise to a market dependence of demand and supply, which determined the value of currencies.
Apart from the legislative consequences, the dynamic development of the Forex market was influenced by technological progress, the development of the Internet and accelerated economic growth. Digitalization enabled virtual transfer of money with simple steps such as pressing a button, which resulted in a friendly reception and willingness to develop such solutions.
In the 1990s, thanks to the development of technology and the increasing access to the global network, companies known as Forex brokers were established, which enabled access to the foreign exchange market and leveraged accounts. This was done by means of dedicated trading platforms created by them, which enabled trading between individual investors in the world. It was then that the Forex market as we know it today began to shape.
The most popular currency pairs and their function
Currency pairs are divided into four main groups: major currency pairs, minor currency pairs, cross and exotic currency pairs. Understanding this division will also make the concept of market functioning possible.
- Main and secondary currency pairs always contain the dollar – major pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF, minors pairs are USD/CAD, AUD/USD and NZD/USD.
- Currency pairs without the dollar are called cross pairs, these are e.g. EUR/JPY, GBP/CHF, AUD/CAD, etc.
- All other pairs are called exotic, as their volume does not exceed 10% of the daily volume on this market. These pairs are generally less floating and less volatile.
By trading on a trend-by-trend basis, you can make a profit when exchanging currencies – this is the heart of the market. To invest well in the market, you need to learn how it works. There is no one “golden mean” to achieve the highest benefits. The safest and probably the simplest strategy is to keep an eye on trends and follow them. However, the whole thing is connected with great emotions, because there is no other such asset market in the world that would provide so many impressions to its participants.
