Foreign exchange market or forex market is a financial market for the global economy. It is decentralized system of trading. This involves currency trading between various countries of the world. Here, the currency of one country is traded against the currency of other country, forming currency pairs. For example, a currency pair USD/JPY means the U.S Dollar (USD) is compared against the currency of Japan, Yen (JPY). Since the market does not exist without the participation of various financial institutions across the globe, it is called as an over-the-counter market.
The major purpose of foreign exchange market is to encourage international trade and investments, by converting one country’s currency in to others. Through forex market the rate of imports and exports in a country increase. It helps in determining the relative values of different countries. A foreign exchange market is a market with high liquidity and high trading volume. The trading in foreign exchange takes place 24/7, all across the globe, except in weekends.
The parties participating in this trading process are banks, commercial banks, investment companies, speculators, central banks, brokers, customers, money transfer companies, etc. For the participants to do trading in a foreign exchange market, it is very important for them to have forex education. Apart from this, right mindset is required to reap benefits from the trading, for which positive trading psychology is required.
The instruments used for transaction in foreign exchange are spot contracts, forward contracts, swaps, future contracts, forex options, etc.
The factors affecting forex rates are economic indicators, political conditions and market psychology.
The trading in foreign exchange market is found to be associated with high risk. Hence, it is recommended for an participant to develop right trading psychology to have profits.