When you convert euros to dollars, maybe for your holiday money, then you are effectively trading your money via the Forex market. However, the money you convert will remain with the company you do it with and not be traded on the markets. This is because they hold on to it to either exchange with someone else or if they end up with a surplus of a currency, they will then trade it on the currency market. When you convert euros to dollars, you are effectively buying dollars at a given price.
Forex or FX, is an abbreviation for Foreign Exchange. Forex trading is basically a way of trading exchange rates between two different currencies with the goal of profiting when the value or exchange rates of the currencies traded move in your favor. The Forex market, with an average trading volume of over $1.3 trillion per day, is the largest and most liquid market in the world, and is open 24 hours a day. Over 90% of all currencies are traded against the US Dollar (USD). The next most-traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).
There are four primary groups that trade the Forex market:
First, the Novice or Retail Traders – these are part-time, mom and pop type traders who are betting on currency direction, not as part of hedging cross currency business transactions.
Second, the Dealers – these are the market makers, setting prices and putting together trades.
The third group, the Institutional Traders, work in banks, large professional investment firms or government and quasi government agencies. These are responsible for the bulk of the forex market. They trade for proprietary profit as well as to facilitate international cross currency transactions for legitimate cross-border business activity.
Last but not least, are the Advanced Traders. This group comprises professional full-time traders, people from all across the world, sitting in smaller investment firms, offices, or even their homes, trading for profit.
The term INTERBANK discussed in FX terminology simply means ‘between banks and large institutions’ where information is exchanged about the current rate at which their clients or they could buy or sell a currency. However, the term ‘Interbank’ today also means anybody who is prepared to buy or sell a currency. Interbank also implies that Forex is not traded on an exchange like equities and futures. The quoted prices for a Forex are based on information from the top banks and large institutions.
Placing a Trade
Placing a trade in the Forex market is simple. The mechanics of a trade are virtually identical to those found in the markets you are trading now. A Forex trade is a trade in which one currency is valued against another. Within this simple framework, numerous trading strategies abound including CFD Trading, Spread Betting, and Binary Options Trading. These require a thorough understanding of forex basics which will help in picking the best forex brokers. To that end forex simulators are a perfect training ground to hone trading skills before trading real money.
Most countries use the Forex markets to decide exchange prices, even though they are very volatile, it is called the flexible exchange rate. It has proven itself over the decades to be the best way of trading currencies, and it is now the biggest trading market in the world.
So when you convert euros to dollars, you are using a massive financial machine to do so, although your small trade will not influence the markets. Many people will try and pick the best day to convert their holiday money, but the odd point here and there in the exchange prices will make little difference unless you are converting thousands.