What Is the Forex Market?
Simply put, foreign exchange is the changing of one currency for another for a period of time. Have you ever visited another country that uses different money than you do at home? Did you buy something while you were there? The exchange of money during that purchase was YOU participating in the foreign exchange market.
Over the last three decades the foreign exchange market has become the world’s largest financial market, which at the time of this writing, has a traded daily volume of over $3 trillion US Dollars. Forex is part of the bank-to-bank currency market known as the 24-hour Interbank market. The Interbank market literally follows the sun around the world, moving from Australia, to the Far East and then to the United States.
Until the 1990s, participation in the forex market was not possible for the average trader or individual speculator. With the large capital needed to meet the minimum transaction sizes and rigid financial requirements; banks, hedge funds, major currency dealers and high net-worth individual speculators were the principal participants. These well capitalized traders were able to take advantage of the superior benefits offered by the forex market over the other traded markets, including fantastic liquidity, better visibility and the strong trending nature that occurs in the world’s major currencies.
This global market is supported by a global electronic network that connects banks, brokers, and other financial organizations. Unlike the U.S. Stock Market, there is no single physical location in the world or central clearing house for the Forex market as no country or economic entity, like the European Union (EU), will allow another country or economic entity to govern and set regulations for its currency or economy.
As with many other things, the advent of the Internet also had a large impact in the foreign exchange market. In 1994, the first online currency transaction occurred. Since then, the market has grown to what it is today. These changes precipitated the expansion of forex participants to include almost anyone with a brokerage account, a PC and an Internet connection. That technology, along with brokerage firms and banks creating the opportunity to trade forex on margin have allowed us enter as participants into the most powerful market in the world.
January 1, 2002, was a memorable day in the history of Forex. Twelve European countries made the decision to unite under one currency named the Euro. The Euro now experiences the highest traded volume of any currency. The countries first added to the Euro currency were: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
The foreign exchange market is really the banks of the world working together to provide a financially stable environment to accommodate the business that must take place between the different nations around the planet.
