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The foreign exchange market (Forex or FX for short) is an exchange market for the trading of international currencies. As such, it is also the largest exchange in the world. Forex dwarfs all other markets. As of April 2010, the Bank of International Settlements had reported the daily trade volume estimated at just under $4 trillion. By comparison, CNN Money reported that the Dow Jones Industrial Average (DJIA) had an average daily trade volume of around $138 Million (as of the writing of this article).
Forex offers the most liquid financial market in the world due in large part to the obvious demand for currency exchange as well as the immediate or short-term nature of many of the currency transactions. Participants on the Forex market run the gamut from banks, governments and huge multi-national corporations to small funds and individual investors.
After World War II, the Bretton Woods system (Named for the conference that took place at the Bretton Woods Hotel in New Hampshire) established monetary control over international exchange by tying the currency rates to the US dollar. It wasn’t until the 1970’s that countries began to adopt a floating or fluctuating exchange rate. This new policy began to proliferate and would eventually become today’s foreign exchange market.
Forex is unique because of its huge trading volume and massively complex inter-dependencies among its underlying currencies, but also because of its continuous operation. Forex operates 24 hours a day except on weekends. Trades are made across three continents, allowing for a very fluid market that reacts almost immediately to events and any new developments. The market opens on Sunday evening and closes Friday night.
Forex assists international trade and investment by enabling currency conversion. For example, it allows a company or individual in the United States to purchase foreign goods by exchanging their dollars for another country’s currency and importing the purchased goods back to the US. Because of this exchange and inter-dependency, Forex determines the relative values of different currencies.
The Forex market helps to facilitate trade and transactions between institutions and countries, but it is also open to individual investment opportunity and investors that seek to speculate in foreign currencies. Individuals who trade in the Forex market typically examine a country’s economic and political situation, as these factors can have a direct impact on the value of its currency. The individual purchases an one currency with a set amount of another currency speculating that a change in the exchange rates will allow them to reconvert, or buy back, the original currency while hopefully securing a profit. Most brokerages and investment banks offer the opportunity for individuals to trade in Forex and . Most people aren’t quite sure how the global foreign exchange market works, or how exchange rates matter beyond making trips abroad more or less expensive. But in reality, Forex is the most influential market in the world.