The foreign exchange market is the buying or selling of currencies. The focus is on foreign exchange transactions arising from international trade and movements in global financial markets.
An elementary example that applies in everyday life is when you travel, when you go on vacation to another country, you have to buy the currency of the country you are going to with the currency of the country where you live.
Coins and their classifications
A currency is a payment denominated in foreign currency, which can be coins, bills, or traveler’s checks.
There are two types of currency: convertible and non-convertible.
Convertible, Flexible, or Floating:
- These are currencies that can be freely exchanged for other coins whose price can be determined by the international market and exchanged without government intervention.
- Major world currencies such as the US dollar, British pound, Swiss franc, yen, and euro are fully convertible currencies.
- In the case of the Mexican peso or the South African rand, they can be exchanged without restriction or interference from any government agency.
- They are the ones that are subject to restrictions in each country, and the state sets the prices.
- The Indian rupee is an example of a partially convertible currency as the Indian government restricts its trade. On the other hand, the real, the Brazilian currency, is a non-convertible currency, also called “blockade,”; that cannot be traded on the global foreign exchange market and the Nigerian naira.
What is the forex market, and how does it work?
Recently we have been hearing about inflation and the depreciation of money. In this sense, many experts have encouraged people to invest and move their money not to lose purchasing power with this technique.
Forex, a foreign exchange market or exchange trading, is one of the world’s most widely use investment vehicles. As the name suggests, this system is based on trading currencies on global markets. Moreover, these markets operate 24/7 and therefore require moving averages for monitoring. But how can the Forex market benefit us? And what are moving averages (EMA indicator) in trading?
What is the foreign exchange market?
When we talk about the foreign exchange or trading market, we refer to the largest financial market in the world. It is a decentralized global market with more than five trillion dollars in movement daily.
In this market, which has no closing time, investors buy and sell currencies of a country, that is, foreign exchange. This makes trading a perfect mechanism to obtain large profits, although it involves risk like any financial operation.
How does the currency market work?
- The currencies of different countries fluctuate in value. So, for example, when we travel to the United Kingdom, sometimes the same money brings us more or fewer pounds. This is due to the currency differences between the different countries or, what is the same, the currency difference.
- The value of a coin depends on many factors. Of course, the economic situation, demand, or inflation can play a decisive role, but there are other causes. In all cases, investors use these risks to improve their income and thus make a profit.
- Thus, a person can buy euros at a given time when their value is at a low level relative to dollars. However, when the euro appreciates, the same investor trades the currency and makes a profit.
Tools to control trading
- Trading is just one of the mechanisms big investors use to make a profit. However, it is essential to know the investment and risks before proceeding. Similarly, investors should monitor the markets using tools like the moving average (MA).
- The indicator by which we know the value of a currency for a given period is called a moving average. Investors have long used the moving average for their investments, although in recent years, the exponential moving average (EMA) has replaced older versions. One of the causes for this is that the EMA, unlike the MA, allows you to know the real-time changes that occur in the market.
- In addition, other average values are used, such as the simple moving average indicator (SMA) or the weighted average indicator (WMA). Among other things, using the EMA allows you to be suspicious and know precisely how a price is moving to anticipate a possible change in the scenario.
Characteristics of the Forex Market
- It is the largest market in the world.
- It is a very volatile and free, and unregulated market.
- Participants are unlikely to be manipulate by the market.
- It is active 24 hours, with no movement on weekends
- Most transactions are concentrate in London, New York, Tokyo, Singapore, Zurich, Hong Kong, and Frankfurt.
- Promote the exchange of money between different countries; some countries have excess liquidity and countries that need it.
The players in this market are varied, from central banks to individuals. At Monex, we care about your finances and study the exchange rate before purchasing.
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