The forex market is an over-the-counter or decentralized foreign exchange marketplace for the foreign trading of specific currencies. This market determines international currency rates for each currency traded. It includes all parts of the buying, trading and selling of currencies in current or predetermined values. It also includes the collection of miscellaneous fees and charges on behalf of the traders.
The forex trading is the largest financial market in the world and a leading source of global finance. Many governments from around the world are regularly involved in the forex exchange. This market also indirectly influences many financial markets including the interest rates on government bonds, commercial loans, insurance and banking.
The forex market works with the intervention of the central bank of a country. In the process of intervention, the central bank alters the domestic interest rate to control inflation and encourage the growth of domestic economy. This increases competitiveness and foreign investment. In this process, the currency value of the foreign exchange market is also affected by the changes in the value of the various currencies of the countries and the interest rate. The central bank may intervene in the foreign currency market either by buying government bonds, currency or bank notes in an effort to control the inflation. On the other hand, the central bank may use other methods like creating more money.
Forex retail traders consist of banks, institutions, corporate groups, individual retail traders and other institutions. They participate in the forex trade by purchasing one currency in order to hold it as long as possible. These traders buy and sell currencies based on their profit and loss position. They do not deal directly with central banks or other financial institutions. Forex retail traders usually trade in one currency pair like EUR/USD, USD/JPY or GBP/USD.
Large banks and institutions are usually the largest forex trading participants. They have the necessary expertise and resources to analyze the forex trends worldwide. They usually set the base rate of a particular currency, so that its fluctuations would be easily observed by traders. They can make decisions on whether to buy a given currency, sell or hold on to a given currency depending on its performance in the forex market.
Smaller banks and organizations are now trading forex for profit as well. The forex trade is usually done through margin trading, which allows small-scale traders to enter the forex markets and engage in the trade. Since forex trading involves a lot of risks, it is better to engage in trades only with the help of a professional broker. Brokerage firms usually charge a fee for their services but they ensure successful trades by providing valuable information on the trend of the market.