About the Forex Market
Forex Market Overview
Forex markets (short for “foreign exchange” markets) are financial markets where world currencies are traded against one another. With an average daily traded volume currently exceeding $3 trillion and over $2 trillion in derivatives, the Forex market is by far the world’s largest financial market. While it is essentially an interbank market, more and more retail forex brokers are seeing the light of day.
Since forex is an OTC (Over-the-Counter) market where brokers negotiate directly with one another through computerized networks, there is no central exchange. The ten major participants – all large international banks – account for over 70% of trading volume. They are the ones that provide the markets with bid and ask prices. The difference between those prices is called the spread. It is the difference between the rate at which a bank will buy and the price at which a bank will sell a given currency.
Factors Affecting the Forex Markets
The main forces affecting currency prices are those of supply and demand, which in turn are a result of the world’s ever-changing events. As such, supply and demand are influenced by a number of factors which can be categorized into three main categories: economic, political and psychological.
- Economic conditions. These include a country’s economic and monetary policies (e.g. budget and trade deficits, interest rates) fixed through central banks and other government agencies, as well as a country’s economic health (presented via statistical reports, forecasts and economic indicators such as GDP, employment levels, growth, etc.)
- Local and global political events. usually, political unrest has a rather negative impact on a country’s economy, unless it is a turmoil that brings to power a party considered responsible on both economic and fiscal levels.
- Market psychology. The foreign exchange markets are also sensitive to market psychology in many ways. For instance, in times of uncertainty, traders tend to turn to stronger currencies thus boosting the demand, and the price of those currencies.