What is Forex?

The Foreign Exchange Market, or simply the Forex Market, is the largest decentralized financial market for foreign exchange operations in the world, handling a volume of money equivalent to about four trillion US dollars per day, which means 3.43 times more than the sum of all securities markets in the world and 9.63 times the volume traded on the world stock market, according to collected data.

    It is an interbank market created in 1971, when international currency trading moved from fixed to floating exchange rates; as a result of its incredible volume and fluidity, this specific financial market ended up becoming the largest and the main financial market in the world; the Forex market currently plays an indispensable role in determining the global exchange rate.

      We can understand the concept of exchange rate as the number of currency units of a nation that must be exchanged in order to acquire a unit of the currency of another country, according to its greater or lesser reciprocal appreciation; with technological development and the advent of the internet, negotiations have been boosted between smaller participants or small investors, allowing them to access real-time news that may affect currency prices.

      This market includes all currency exchanges made daily between major world banks, central banks in numerous countries, large multinational corporations, diverse governments and other transnational financial institutions; small investors constitute a very small part of this market, only being able to participate indirectly through authorized stock brokers and banks that offer this type of highly speculative investment to their clients.

In this respect, when used for financial speculation/forecasting purposes, the Forex Market has unique characteristics, namely:

· Its trading is always done taking into account a certain currency pair, such as the Euro / Dollar ratio;

· The extremely high daily volume of transactions carried out also provides high liquidity;

· As it is a virtual and decentralized market, its geographical dispersion takes into account the time zones of the markets around the globe;

· As a result, its operation is continuous, operating 24 hours a day except weekends, with operations starting in the Asian market from 8:15 UTC on Sunday until 10:00 UTC on Friday;

· A wide variety of external factors can affect the exchange rate, being highly volatile; and,

· It allows the use of leverage to allow variation of the margin depending on the size of the client's account, which can significantly increase the gains and also the risks involved, to the same extent.

      The operation structure in the Forex market involves the purchase of one currency and the simultaneous sale of another, that is, the currencies are traded in PAIRS, for example: dollar and yen (USD / JPY). The investor does not physically buy dollars or yen, but a monetary exchange ratio between them. FOREX is a market in which, therefore, currency derivatives are traded, or contracts whose underlying assets are currency pairs. He (the investor) is thus remunerated for the differences between the appreciation of these currencies.

     As currency quotes (dollars, euros, pounds, etc.) vary freely, under the influence of political events or economic factors, there is a potential for investment strategies to be made to profit from these fluctuations. This market also allows the implementation of protection strategies ("hedge") against variations in the exchange rate, which can be particularly useful for those who have income or expenses affected by the quotation of a given currency, such as exporters, for example. In the case of individuals, this need may arise when they know that they will have an expense in foreign currency at a future date.

      The big attraction / risk of trading in the Forex market is the use of leveraged "margin" to trade, a mechanism that allows you to trade a larger volume of money by applying only a part of this amount in reality; as the operation is settled only by the difference between the valuations of different currencies, it is not necessary for the investor to have available the full amount of resources involved in the operation.

     The Forex market allows only a “margin” to be deposited to cover the daily variations of the currency pairs, so that this margin gives the investor greater power to trade, thus being able to carry out large transactions; for example, in some foreign brokers (“brokers”), the operating margin can reach 100: 1, allowing the investor (called “trader”) to make a transaction with the reference value of 100 thousand dollars, for example, depositing only $ 1,000.

This structure allows greater profits to be made, but also ends up making greater losses possible. The logic is the same, in fact, because as the value that can be negotiated with a given investment is multiplied, so are the results, positive and negative. Therefore, what should be kept in mind is that there is RISK in this market and that this risk grows a lot by operating at margin.

Hope you readers find this content valuable and helpful,

Good luck on your trading career!

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