How Does Foreign Exchange Work?

How Does Foreign Exchange Work?

The foreign exchange market is a trading place where people can compare and trade different currencies. Since it is a decentralized market, it does not operate like the stock market. Forex takes places only on online platforms and happens around the world. If a trader is buying and selling any currencies, he is involved in the forex market.

Forex works for traders, businessmen, and even travellers who want to convert their currency for travelling to a foreign destination. International trades make businesses spend billions in foreign currencies on a daily basis. Banks also trade huge amounts of currency daily in the international market. With all these different factors influencing the forex on an everyday basis, the market makes trades for over $5 trillion daily. The traders use the forex rates for their advantage. They buy a currency which they believe will rise, and if it does, they sell the currency to make a profit from the differential. One needs to have knowledge of different economies and should stay updated to make the right predictions to make profits from forex.


Forex timing

Forex market is the best option for day traders as it operates 24 hours a day for five days a week. Since it is an online market and the whole world can trade in the same platform, the market needs to be open 24 hours. In real-time, day in Japan means night in Europe, so trading is only possible when the market is open in both regions.

Five days does not mean that the market closes at the weekends. But since the operators of the forex platform will only make the exchange during the operating hours, the fluctuating prices does not show on the platform for trading.

Determining the currency

The value of a currency is determined by the demand of the currency in the market. Certain events can make a currency get more attention in the market, which makes all traders buy it. With a limited supply and high demand, the price of the currency also increases, making it profitable for the traders who bought it before the demand. Currencies are traded in pairs in which one currency increases its value while the other one loses it.

Forex timing

Economic factors that affect currencies

The strength and weakness of a currency depend on multiple factors. Higher inflation depreciates the currency value, and lower inflation appreciates the currency value. Inflation and interest rates are also connected. As the interest rate decreases, people borrow more and spend more which causes inflation. When the interest rates increase, borrowing becomes difficult, and inflation decreases. The change in interest rates plays a major role for investors. A country with a high-interest rate can provide profits to the investor, and the foreign investors bring in high capital which increases the exchange rate.

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