The Foreign Exchange Market Involves Trading One Currency for Another
If there were a worldwide Forex trading 101 course, it would explain the simple process of trading one currency for another. Forex exchanges are made between currency speculators, central banks, large banks, governments, multinational corporations, and other financial markets, and that practice has produced the largest financial market in the world.
Over three trillion dollars is exchanged everyday in the foreign exchange market, and that astonishing figure makes the forex market much larger than all the American stock markets combined. Trading is done in all corners of the world, and for the most part those trades are executed without cash trading hands.
The forex market is open twenty-four hours a day in order to react to new political, social, and financial developments. The market opens Sunday evening and closes Friday night. Most financial experts say the forex market has a low commission/trade ratio due to the size of the trades even though some forex traders have introduced a per trade commission along with the pip spread. The pip spread is the difference between the bid and offer/ask price. That difference is considered the commission for each trade.
The forex market does have different trading levels so pip and commission rates vary based on the customer and the value of the trades. Big banks have a tiny pip spread; investment banks, large retailers, and multinational corporations have a slightly higher spread, and small companies and individual investors are given another spread.
Currency Prices Can Only Fluctuate Relative to Another Currency
Forex trading is done in currency pairs. The most popular pairs are the US Dollar and the British Pound (USD/GBP); the US Dollar and the Euro (USD/EUR); the US Dollar and the Japanese Yen (USD/JPY), and several other currencies like the Australian Dollar, the Swiss Franc, and just about any other currency that is recognized in the forex market.
Most forex traders use a 100:1 ratio to make trades so a $100,000 position only requires a $1,000 investment to control that position. Most traders require investors to have more than the trading amount in the account so the account does not go into a negative position. The standard lot is 100,000 units of the base currency. Currency pairs are purchased by buying 100,000 units of the counter or quote currency. In a EUR/USD trade the USD is the base and it will always have a pip of $10 on a 1/100th of a percent trade. The pip value varies based on the base currency.
The Currency in Most Countries is Constantly Fluctuating Except for the Chinese Yuan
Most governments allow their currencies to fluctuate so the forex market is always offering investor opportunities as well as financial fiascos. The Chinese government controls the fluctuation of the Yuan and that practice is creating an enormous amount of criticism from other countries that believe China is artificially controlling the value of their products as well as proving they are the next Superpower. If the value of the currency traded in the forex market is controlled by governments, the world economy suffers.