What is FX?
FX or FOREX stands for Foreign Exchange, and this refers to trading one foreign currency against another. It is not based in any one particular country and is un-regulated as it is not controlled by any exchange. This ‘hands off’ approach from the authorities has encouraged the FX market to grow into the world’s largest and most liquid financial market.
Quite simply with FX, the value of one countries currency is quoted against the value of another’s. So for example with GBP/USD, which is the Great British Pound versus the US Dollar, if the exchange rate is 1.6550 this means that one pound in the UK is worth 1.6550 US Dollars.
This exchange rate moves constantly and reflects changes in sentiment around the world due to economic or political news and the physical transaction volume taking place. It trades 24 hours a day, five days a week. Although, if you count the millions of Bureau de Change’s around the world, it trades seven days a week.
The average daily volume traded in FX throughout the world is thought to be in excess of US$ 3 trillion, and growing every year. The largest center for these trades is London with New York and Tokyo coming second and third respectively. The main participants to this volume are banks, companies, governments, hedge funds, and other types of financial institutions.
The vast majority of the FX traded is speculative and short term only, and goes some way to explain the vast sums that are traded every day. Also with the advent of derivative products, more and more FX is traded as a by-product of this.
With the advent of the internet, and the introduction of on-line dealing applications for the retail investor, volumes have further been increased, and it is thought that this sector now makes up in excess of 2% of the global FX volumes.
The top three currency pairs traded throughout the world are Euro vs US Dollar, US Dollar vs Japanese Yen and Great British Pound vs US Dollar, and some 80% of all FX volumes are carried out by the top 10 banks in the world. So these banks can move an exchange rate themselves just with the volumes they trade.
But there are many other factors which affect an exchange rate. A countries political stability is very important in determining the strength of its currency as investors will not want to buy their currency to invest in that country if it is not safe. Other things to consider are economic policy, geographical problems like earth quakes, terrorism, technical trading (trading from charts), rumours and commercial deals.
