Forex is a derivative of the Foreign Exchange market, where it involves the trading of currencies. Unlike other financial markets, this market deals with currencies and not stocks or bonds.
The two currencies in the Forex market are the two main worldwide currencies, which are the US dollar and the Euro. The US dollar price is set at a fixed rate so that it remains constant and this is known as the base currency. The Euro price is pegged to the US dollar.
In the Forex market, currencies are bought or sold at a certain percentage of their current value. Some factors that influence the price of currency include the size of the country’s economy, interest rates, interest rates on government bonds, interest rates on corporate bonds, currency exchange rates, inflation rates, and political events.
The currencies are usually traded on major exchanges such as the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). However, it can also be traded on other Forex market exchanges such as Intercontinental Exchange (ICE) and the Swiss Exchange (SIX).
Forex traders use leverage in order to increase their gains on the Forex market. This is done by buying currency pairs and combining them with one another. This way, traders have more options available for trading.
Also, it is wise to know that there are different types of Forex brokers. Each type has its own characteristics and has different types of services. The most common types of brokers are the high-frequency ones and the lower frequency ones.
The high-frequency traders use fundamental analysis to make decisions regarding the exchange rates. They rely on various aspects like the economic stability of a country, their monetary policy, exchange rates, unemployment rate, interest rates, and inflation rate. Then they enter and exit the market based on their knowledge of these factors.
Low-frequency brokers have no systematic knowledge of the Forex market and relies entirely on fundamental analysis. Because of this, their decision-making process is less reliable and the gains they make are less as compared to the high-frequency broker.
Brokers that are used over the internet are referred to as wire brokers because they do not have a physical presence in the marketplace. In addition, the client does not need to go to the broker personally but can contact him through the internet.
The broker can meet up with his clients and conduct negotiations, which in turn will lead to an increase in the number of transactions processed by the company. Due to the decreased cost of conducting these negotiations, many brokers can offer more favorable terms to their clients. Some of these terms include lower settlement fees, cut the commission rates, and less standard fees and commissions.
Forex brokers are employed by people and institutions who do not have much knowledge about Forex. But, they can still gain benefits from the Forex market by employing the services of a broker.