Forex is the world’s largest exchange of currencies. Its opening was in Sydney in Australia in July 1997 and it became one of the most popular markets in the world. In the United States, it began in November 1997. In addition to being the world’s largest financial market, the forex is also the largest trading market in the world with daily transaction volumes estimated at a whopping 3 trillion dollars.
The form is very different from the traditional stock market in that it not only deals in currencies but it also deals in commodity and futures. Both these categories are subject to intense and extreme liquidity conditions. One of the reasons why forex is able to manage this liquidity is that it exists between pairs of currencies. A forex broker keeps a large number of customer accounts and manages them all in order to provide the maximum liquidity. If one account had an accident or was liquidated, no other account would have access to the customer’s funds.
Commodities and futures are commonly traded on the forex. Commodities are products such as oil, gold, silver, wheat, pork bellies, and other similar items. Futures deal with agricultural products like sugar, corn, soy beans, and other similar foodstuffs. Because of the high volatility of the futures markets, they have to be traded very quickly and are subject to sudden changes in price.
One of the biggest reasons that forex brokers make money is through currency futures and options. Currency futures allow people to speculate on the possible increase or decrease of the value of a certain currency. For example, if the British pound was valued at two pounds a year ago, and is now valued at three pounds a year, then this would represent a gain of twenty pounds. This would result in the purchase of currency futures. On the other hand, if ten million pounds were owed to a United Kingdom citizen, and the pound’s value has since dropped to ninety thousand pounds, then the person is holding currency futures.
Another way that forex deals with foreign exchange is through options. Options are put into place to provide investors with the opportunity to purchase a specific option at a certain price, at a certain date, for a certain duration. It may buy one US dollar at a price of two British pounds and then sell it for ten US dollars. This would correspond to the expiration of the option.
Futures and options are usually traded on U.S. exchanges, but they can also be traded over the Counter (OTC). OTC currency exchanges allow individuals to trade in currencies without actually needing to exchange currencies. OTC trading is usually done online. However, it is still very popular in the United Kingdom. There are many individuals who trade on the OTC market to help offset the spread they would normally have on the larger and more heavily traded U.S. exchanges.
Some foreign exchange traders prefer to trade via options contracts. These are contracts which specify the strike price, expiration date, and quantity. This allows the trader to set a limit as to what he will pay if the option is ever exercised. Many forex traders like to use this option for trading volume control.
As can be seen, there are many different ways that traders use the Foreign Exchange market to their advantage. A trader can buy one U.S. dollar at a price of two British pounds, or he can buy ten U.S. dollars and sell them for fifty British pounds. The decision to invest in forex is up to the individual trader. He can invest his money in several different ways and earn different incomes. A successful forex trader can earn five, six, or even seven figures per year; but, he must know when to stop, or he may lose all his money!
