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Forex stands for foreign exchange. The market for forex is where banks and other financial instruments trade in foreign currencies in which they buy an amount of one currency in lieu of an amount of another. Today's market dates back to 1971, which was when countries the world over, slowly started to shift from a fixed exchange rate for their currencies to a floating one.
The forex market, the regular daily volume of which is increasing gradually, the turnover being in the neighborhood of $3.2 trillion daily, handles business among large banks, central banks, currency speculators, corporations, governments, and other institutions. The forex market is useful in facilitation of business and investments, and is essential in the context of international trading with different currencies. What make the forex market special are the volumes in which trading takes place, geographical distribution, market liquidity, diverse aspects that influence rates of exchange, and the timeline for trading which is 24X7, Monday to Friday.
What makes the forex market special is that here, as opposed to a stock market, where all parties are subject to the same price, the marketplace is categorized into distinct access grades. The participants in the forex market include banks that do business for their accounts as well as that of their clients, financial firms who look for forex to buy items or services, central banks of countries who attempt at managing money supply, inflation, and rates of exchange, and hedge funds who act as professional speculators about money movement. Other players in the field would include investment management firms who utilize the forex market to assist transactions in foreign securities, retail brokers specializing in either retail forex or market making, and other parties like non-bank participants who might use forex as a means of payment.
The forex trading market is rather complex. In the absence of any central clearing market for trades, sparse regulation for cross-border business, and the most prevalent over-the-counter (OTC) character of forex markets, there are quite a few interconnected marketplaces in which different currency instruments are used, meaning that there are different rates of exchange depending on the specific bank or market, and its geographical situation.
The exchange rates for forex are determined by a plethora of factors, such as international parity conditions, balance of payments model, asset market model, etc. Requirement, provision, and value of any currency are affected by many factors of economics, politics, and psychology of market players. Economic growth and well being of a nation, its government's budget lacks or extras, trade balances, inflation, the national economy's productivity etc have as much influence on the forex market as does the national, international, and regional political situation of upheaval and stability. In the face of all such events, the factor of market psychology and perceptions of businessmen affect the forex market in different methods which have been termed as flights to quality, long-term trends, 'buy the rumor, sell the fact" etc. Though economic policy is merely reflected in numbers, sometimes these numbers tend to affect the collective consciousness of trading, resulting in some drastic short term moves.
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