How The Foreign Exchange Market Works

About the forex market:

The need for forex market arose when the import and export trades of nations started growing.  The origin of the forex market can be traced from 1875 when countries used gold and silver to effect payments across the border.  This scenario changed with the erupting of the world wars which made the countries opt for more liquid currency rather than precious metals.  The Bretton woods system resulted in fixing the US dollar replacing gold and gradually led to the development of the forex market.

What is forex market:

It is the market where selling, buying, exchange and speculation of foreign currencies are done by market participants mainly the commercial banks, central banks, forex brokers, investors, investment fund managers etc.

How it works:

It is literally not confined to a building or any area.  But it is a network of computers through which the participants trade in the foreign currencies.  The makers of the forex market are brokers like Mejor broker forex.  They buy and sell foreign currencies.  They quote selling prices or place bids for buying these.  Depending on the demand the prices fluctuate.

The forex market can be broadly classified into the inter-bank market and OTC market.  In the interbank market, the main players are banking institutions.  Individuals and brokers dominate the OTC market.

Timings:

Since the market operates around the world, the timing can be broadly mentioned as Monday morning of Asia till Friday late noon of New York.  So, the market functions even while you are sleeping.  The USD and EUR are the currencies which are traded in huge volumes.

Benefits:

Benefits of having a forex market is as follows:

  1. It enables trading round the clock.
  2. It helps in reduced transaction cost
  3. It helps in more leveraging of currencies
  4. It helps in giving a regulated environment for trading currency.
  5. It enables faster transactions and quick conversion so that comfortable liquidity is ensured.