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FX101: Forex Explained

In Business and Currency by Continental StaffLeave a Comment

Forex means ‘foreign exchange’ but if you are like most people, you may not know all that much about the world of forex trading. That’s okay. You don’t need to be a forex trader to be part of the forex market.

Anyone who has ever exchanged currency has been been part of the forex market. When you visit Europe you trade your CAD (Canadian dollars) for EUR (euros). Even if you have never left Canada the forex market still plays a big role in your daily life. Anytime you buy a foreign product, or do business with a company that operates outside of Canada, the transaction relies on foreign exchange to convert the currencies.

How much currency is traded on the Forex market?

In our highly globalised world full of international travel and trade, it should come as no surprise to learn that the forex market is the largest market in the world with over $US5.1 trillion traded each and every day as of 2016 according to Business Insider. Even more amazingly, this number is actually down from three years prior when the forex market averaged $US5.4 trillion.

Where is the Forex market?

Unlike stock markets such as the TSX, the global forex market doesn’t actually have a centralised physical location. The market runs 24/7 which is what global trade demands in order to run smoothly. The global forex hubs are spread out among different time zones in some of the globes biggest banking cities including: New York, London, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.

How is forex traded?

There are three ways to trade forex: the spot market, the forwards market and the futures market.

What is the spot market?

The spot market is simply the name given to the vast amounts of currency that are traded at the current exchange rate of any given day (see what factors affect exchange rates here). One company, trader, or organisation simply agrees to sell another currency at the agreed upon exchange rate. Unlike trading money at your nearest Continental Currency Exchange these exchanges are often in the hundreds of millions of dollars or more and usually take two days.

What is the forex forwards market?

The forex forwards market, unlike the spot market, doesn’t deal with currency directly. Instead forex forwards are contracts which specify that a specific currency will be sold for a specific price on or by a specific date. A forex forward might be something like this: $CA2 million to be bought for $US1.5 million on January 1, 2019.

What is the forex futures market?

Forex futures trading is similar to forwards, but more heavily regulated. Contracts are traded based on standard sizes, and specific details regarding size, delivery and settlement dates. They are traded on commodities markets like the Chicago Mercantile Exchange.

What is the point of forex forwards and futures?

By setting an agreed-upon exchange for a future date rate it removes volatility from the price, but it may also over- or under-shoot the actual exchange rate by a wide margin which can lead to serious losses (and, on the other side of the same trade, serious gains). Companies uses forwards and futures to hedge their exchange rate trades and protect themselves from losses. Forwards and futures can also be bought and sold by traders who speculate on the price to try to make a profit.  

How do I get involved in forex trading?

If you are just looking to buy or sell currency for personal use or even for your business, then you should be using a commercial foreign exchange specialist. Find the best deal by avoiding airport exchangers, and keep an eye out for places that charge commission or hidden fees.

If you want to buy and sell currency speculatively in order to make a profit, you will have to look beyond your local currency experts.

Online forex trading

Until recently currency trading was the preserve of big corporations, central banks, hedge funds and highly specialised traders. Today it is more accessible than ever. There are many software programs you can use to trade currency right from home. But be warned, just because it is easy doesn’t make it necessarily safe. All investments can carry significant risk, and the forex market is no different.

If you are considering dipping your toes in the forex market then you should seek out specialised tutorials (and always be skeptical of get-rich-quick schemes) and start keeping an eye on currency markets. Learn as much as you can about how currency works and follow currency news. Reading through our FX101 pages is a good start!

Free currency converter

Whether you are thinking of getting into the forex market, or just want to keep an eye on the CAD’s exchange rate you can sign up for a FREE Currency Converter courtesy of Continental Currency Exchange

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