What Is Forex ?

Forex is a term you may have heard before and whether you are aware of it or not, you have probably taken part in it if you ever travelled abroad and bought a foreign currency, for example. But have you ever stopped to think about what it actually means?
In this article, we delve into the details of Forex trading, from basic Forex terms traders should familiarise themselves with, to types of Forex pairs and more.

Forex in Basic Terms:

In basic terms, foreign exchange or Forex refers to the purchase of one currency against another, but its value is much deeper than that. The Forex market is the world's largest financial market. It is also the most liquid market with an average daily trading volume of $6.6 trillion, making it one of the most actively traded markets in the world.

What Types of Forex Markets Are Available?

In the world of forex, there are 6 primary markets:

• * Spot Forex Market – The physical exchange of a currency pair, taking place on the spot date (generally, this refers to the day of the trade plus 2 days - “T+2”). The spot market involves an immediate exchange of currency between purchasers and brokers. Banks, both central and commercial, and dealers are the main participants in the Spot Forex Market.
• * Forward Forex Market – An Over Counter (OTC) contract to Buy or Sell a set amount of a currency at a certain price at a future date. This type of market can be very efficient for traders who are looking to hedge by selling their assets at a fixed price in order to avert possible future losses.
• * Forex Futures Market – The main difference between the spot market and futures market is that futures are legally binding. A forex futures contract is an exchange-traded contract to Buy or Sell a specified amount of a given currency at a predetermined price on a set date in the future. Moreover, this type of market is known for its high liquidity.
• * Swap Forex Market – It is essentially a transaction (a simultaneous purchase and sale) of Forex pairs in which the parties grant one another an equivalent amount of money using different currencies.
• * Option Forex Market – Options are contracts whereby the seller gives the right, but not the obligation, to the buyer to buy or sell a Forex pair at a predetermined price. Using a call or a put option allows you to either buy or sell the pair accordingly.
• * CFDs Market – A CFD, or a contract for difference, is an agreement between a buyer and seller, or a client and a provider like Plus500. The contract stipulates that the buyer is obligated to pay the seller the price difference of the underlying asset’s current value in comparison to its value when the contract was initiated.

What Moves the Forex Market?

There are many different factors that can affect the forex market. Below you can find a few:

• * Central banks – The world’s money supply is determined by central banks. If a central bank increases the money supply, the currency will likely drop. Generally, central banks also control interest rate levels, which is critical to the strength or weakness of a currency.
• * Economic data – Reports on the state of the economy serve as an important indicator of the currency’s strength. Major economic data includes unemployment rates, inflation rates, and trade balances. Traders can utilise Plus500’s free Economic Calendar in order to help keep track of important economic events.
• * Interest rates – Volatile currency moves tend to occur when a country’s central bank makes an unexpected move in interest rates. For example, if a central bank decides to unexpectedly cut interest rates in the currency, this will normally lead to a significant drop in value (as the market responds to the sudden change in monetary policy).