wht is a forex?

FOREX, an acronym for Foreign Exchange, is the largest financial market in the world. With an estimated $1.5 trillion in currencies traded daily, Forex provides income to millions of traders and large banks worldwide. The market is so large in volume that it would take the New York Stock Exchange, with a daily average of under $20 billion, almost three months to reach the amount traded in one day on the Foreign Exchange Market.Forex, unlike other financial markets, is not tied to an actual stock exchange. Currencies are traded directly through networks of banks and brokers via an electronic network or the telephone. The Foreign Exchange Market is, therefore, also referred to as an "Interbank" or "Over the Counter (OTC)" market.PurposeThe foreign exchange market is the mechanism by which currencies are valued relative to one another, and exchanged. An individual or institution buys one currency and sells another in a simultaneous transaction. Currency trading always occurs in pairs where one currency is sold for another and is represented in the following notation: EUR/USD or CHF/YEN. The exchange rate is determined through the interaction of market forces dealing with supply and demand.Traders generate profits, or losses, by speculating whether a currency will rise or fall in value in comparison to another currency. A trader would buy the currency which is anticipated to gain in value, or sell the currency which is anticipated to lose value against another currency. The value of a currency, in the simplest explanation, is a reflection of the condition of that country's economy with respect to other major economies. The Forex market does not rely on any one particular economy. Whether or not an economy is flourishing or falling into a recession, a trader can earn money by either buying or selling the currency. Reactive trading is the buying or selling of currencies in response to economic or political events, while speculative trading is based on a trader anticipating events.BackgroundHistorically, Forex has been dominated by inter-world investment and commercial banks, money portfolio managers, money brokers, large corporations, and very few private traders. Lately this trend has changed. With the advances in internet technology, plus the industry's unique leveraging options, more and more individual traders are getting involved in the market for the purposes of speculation. While other reasons for participating in the market include facilitating commercial transactions (whether it is an international corporation converting its profits, or hedging against future price drops), speculation for profit has become the most popular motive for Forex trading for both big and small participants 1.3 Aspects of Trading
Most trades on the forex market are a result of traders speculating price movements of certain currencies. Although, good instincts and speculation skills are invaluable to any trader, there are also other, more scientific factors that traders use to tell whether they will buy or sell a certain currency. These factors are very important aspects of trading on the market and are known as fundamental and technical analyses. A trader may utilize both technical and fundamental analyses before making any forex trades.
The Importance of Fundamental Analysis
These factors include economic and political events (i.e. elections, wars) that occur worldwide. Fundamentals include monetary and fiscal policy, government reports such as GDP, CPI, PPI, and measures such as the unemployment rate. A trader that bases his or her market decisions in response to these releases and events is using fundamental analysis. The value of a currency in the Forex market is essentially an indication of the state of one nation's economy in comparison to another nation's.
A nation's political condition, along with its inflation and interest rates, impact the price of the nation's currency. Traders that use fundamental analysis can speculate on currency price movements by paying attention to the world news, economic reports, and indicators issued by the government. By interpreting that data, traders can make better decisions on the market. It is important to note that it is the outlook of an event that impacts the Forex market, rather than the actual event itself. If the report or news matches expectations it should have already been priced in to the present market price. If a report or news item is unexpected, or is different from the anticipated results, then there will be a reaction by the currency markets to "price in" this new information. We explore fundamental analysis in greater detail in Lesson 6.
The Importance of Technical Analysis
Traders have a second tool to use in trading. Technical analysis, which has become extremely popular since its inception two decades ago, consists of using charts, trend lines, support and resistance levels, technical indicators and identifying patterns to study the market's behavior. Traders use these technical factors to identify buying and selling opportunities. Over long historical periods, currency behavior has produced trends and patterns that are identifiable. We explore the basics of technical analysis in Lesson 7.