The forex market is a complex global market that can be difficult for those unfamiliar to navigate. It’s a market where currencies can be exchanged and where investors can make a profit. But what exactly is the forex market?

What is Forex Trading?

Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.

The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.

Different Ways of Trading Forex

There are three ways to trade Forex:

• Spot Market: This is the primary market for trading forex; here, pairings of currencies are swapped, and the exchange rate is determined based on demand and supply.
• Forward Market: Instead of initiating a trade, traders can have a binding contract with another trader in the forward market. The two parties will also decide the exchange rate, amount of currency, and a future date.
• Futures Market: Like the forward market, traders can opt for a contract to sell or buy a fixed amount of the currency at a specific exchange rate in the futures market. 

Five Factors that Affect the Forex Market

The thing that stands out about the Forex market is that it has many various types of traders and trading instruments. Therefore, traders from anywhere in the world have the opportunity to diversify their portfolios by investing in different currency pairings. 

Another big advantage that the Forex market has over other markets is that it is operational 24 hours to trade their favorite currency pairing from anywhere and at any time. In addition, the market has over 5.4 trillion US dollars daily, so there are price movements in all currency pairings.

Forex may also use a feature known as ‘Artificial bits of Intelligence’ in their trading, making the trading activity automatic. Due to sufficient liquidity in the Forex market, this artificial intelligence strategy works just fine. Let’s now discuss the five key factors that influence the Forex market:

• Interest Rate Decisions
• Political Stability
• Current Account and Terms of Trade
• Inflation Report
• Speculation

Interest Rate Decision

Interest is a charge that the central bank takes from the citizens to run its currency. Every central bank in the world, from time to time, will charge interest rates to meet its economic goals. The central bank will also increase the interest rates if the economic flow rises. 

On the other hand, if the bank wants people to make money from it, it will decrease the interest rates. Therefore, the overall interest rate decision will impact the economy (Positive/Negative); however, nowadays, all the countries depend on each other, so interest charges in the US might affect the global economy.

When the central bank changes the interest rate, it will either increase or decrease the value of a specific currency against other currencies. Therefore, there might be a change in the Forex market based on the interest rate decision.

Inflation Report

A country with a low inflation rate represents a currency whose value increases as its purchasing power rises. During the second half of the twentieth century, Japan, Switzerland, Germany, and other countries were considered economies with the low inflation rate.

Later on, Canada and the United States also achieved low inflation rates. On the contrary, countries with a high inflation rate see a depreciation in the value of their currency, and their interest rates are also high. 

Political Stability

Let’s put the economic factors aside for once and focus on political stability, as it does impact the country’s exchange rate. For example, suppose a country wants to attract foreign investment. In that case, it needs to make sure that it is politically stable, as no investor will be attracted to an economy that is politically unstable as it increases the risk.

However, if the country does end up receiving foreign investment, the value of its domestic currency will increase. 

Speculation

The Forex market is all about speculation, and investment is made before increasing the value of the currencies. This way, the price of the currency pairings rises without a fundamental event. So, if the investors speculate that the price of the EURO is expected to gain momentum against the United States dollar, the price of the EUR/USD pair will rise.

Current Account and Trade Deficit

The current account maintains the records of a country’s transactions with its trade partners. If the countries imports are higher than the exports, then the account will be in deficit. The main reason for this deficit is that foreign currency reserves in the country are greater than the supply. 

Therefore, the excess supply of foreign currency causes the value of the domestic currency to depreciate significantly. Similarly, the term of trade is a ratio between the import and export prices. Thus, when the terms of trade are favorable, the export price is higher than the import price. 

An increase in terms of trade is an indication of greater demand for the country’s exports. Therefore, this increase will be considered positive for the domestic currency, and the rising terms of trade will also increase the exchange rate.

Other Factors

Apart from these key factors, there are other factors as well that might impact the Forex market, and they have been listed below:

• Geopolitical Uncertainty
• Corporate Earnings
• Business Environment
• Global Trade Growth

What Moves the Forex Market?

Like other marketplaces, the price of the currencies is determined by their supply and demand. However, other factors in the forex market need to be considered. For example, sometimes, demand for a certain currency can be influenced by the political climate of the country, economic growth, and interest rates.

Frequently Asked Questions (FAQ) About the Forex Market

1. Who owns Forex, and where is it located?

Forex does not have a particular owner; it is an interbank market, which means transactions occur between a seller and a buyer. Therefore, as long as the current banking system exists, Forex will exist as a specific government or country that does not run it.

2. Working Hours of Forex?

Forex opens at 22:00 GMT on Sunday (Australian trading session opens) and closes on Friday 22:00 GMT (US trading session closes)

3. How Much Money is Needed to Start Forex?

Some traders start trading with just a dollar; however, the starting amount varies from 100 to 100,000 dollars. 

4. Best Strategy for Forex?

No one strategy is better than the other one; traders must develop new strategies all the time. Some Forex strategies are only beneficial in the short term.

Conclusion

As you can see, several factors affect the Forex market, so traders need to be careful and smart before they invest. Traders should also carefully analyze the factors and make their move accordingly. However, some factors may be difficult to predict, which means that the Forex market isn’t safe and risk is involved.