forex market

The Forex market was founded in 1971.

The main principle of forex is converting one currency into another. Even if you compare it to the turnover of the American equity exchange (300 billion dollars a day) and to the turnover of the stock market (10 billion dollars a day), the volume of currency Forex operates with will seem really huge. As registered by Wall Street Journal, in September, 1992 this amount was about a trillion dollars a day. Nowadays, the turnover of Forex is from 1 to 1,5 trillion dollars a day.

The main thing in the Forex is that dollar competes with four main currencies: British pound sterling, Japanese yen, Swiss franc and Euro. Government and commercial banks, corporations, brokers and other financial organizations are involved into operations on the forex market in the first place. Most active participants are brokers.

Forex is not a usual market. It has no single center. Today, trading on this market is carried out with the help of telephones and computer terminals. So what is the Forex market in comparison with a regular foreign exchange?

It is really important for a potential investor to know the difference between the Forex foreign exchange market and operations at a regular foreign exchange. In case with a foreign exchange, the total sum of each contract is always known in advance. Exchange traders at foreign exchanges use "performance bond" or "margin" to control exchange contracts ("margin" means money deposited by the buyer or the seller while making a contract). However, as to liquidity on such a market, foreign exchanges seems to be rather limited because the information flow stops when the exchange is closed at the end of each day (the same as at a stock exchange), which interrupts the continuity of your evaluations and your staying in touch with the market. This fact makes a lot of traders worry. For example, if important data are coming from England and Japan while the American foreign exchange is already closed, a trader will lack the information necessary to successfully start trading the next day.

Unlike foreign exchanges, trading at the Forex market is held 24 hours a day and never stops. In all time zones in any of the world's major trading centers (London, New York, Tokyo, Hong Kong, Sydney, etc.) there are dealers ready to give you the opportunity to start trading in both directions. It was mentioned above that the turnover of this market is from 1 to 1.5 trillion dollars a day and this fact gives the market virtually unlimited liquidity. Due to its huge daily turnover and permanent purchasing power, the Forex market has no match in the entire world regarding its dynamic and tension.

What makes the market move? Among the main factors influencing currency exchange rates there are balance of mutual payments, economic condition, forecasts based on technical analysis graphs, as well as political and psychological factors.

The movement of capital between countries can be considered as the main factor determining the current state of the market. Besides, such factors as inflation and discount rates can also considerably influence currency exchange rates. At the same time, there is no doubt that another important fact is that there is always a ceratin state behind each currency. There are two ways states can control the market. The first one is just control and the second one is the so-called intervention. Currency control prevents citizens from doing anything that can have a negative influence on the exchange rate (for example, transferring money abroad). In the first place, intervention means changing the discount rate, which makes the currency more or less attractive for foreigners. And second, it means selling or buying the currency in order to increase or reduce its cost on the market.

All the factors mentioned above may cause sudden and often dramatic changes on the market if some unexpected and considerable changes occur in them. This is the main reason accounting for the fact that sometimes the anticipation of some economic changes alone exerts much more influence on the exchange rate than actual events. The activities of large financial funds also influence the market greatly. Though all of them can make moves on their own, they are at least well aware about all the peculiarities in the changes of exchange rates for each main currency. When the graph describing how some exchange rate floats reaches some node point, the market behavior becomes technically predictable and, therefore, managers of major financial funds react in a predictable way, which often means the same or similar way. As a result, there is a sudden and powerful upsurge in prices and large financial volumes get invested into the same positions.

Recently, professional investors have considerably increased the level of participating in Forex. Together with a constantly increasing number of private individual investors, it makes the Forex market a dynamically developing one.