The worldwide Foreign Currency Exchange Market, also referred to as the "Forex" (FOReign EXchange) or "FX" market, is the largest financial market in the world. Operating virtually around the clock, the Forex market trades enormous amounts of money, which is estimated at several trillion dollars daily. This daily volume is larger than the combined volume of all the worlds' stock markets. The Forex market is not centrally located. It is an over-the-counter market where buyers and sellers conduct business linked by telephones, computers, fax machines, and other means of instant communications.

Foreign exchange involves trading one nations currency for the currency of another nation. As individuals or companies from one country trade across borders, the need for foreign currency arises. For example, when a U .S. importer buys French wine, either the importer needs euros to pay the French merchant or the French merchant must accept U.S. dollars and convert them to euros.

What factors influence the FOREX market?

The factors that affect the FX market are mainly political and economic. Economies of different countries develop in a cyclical fashion (upturns and depressions), and the cycles do not often coincide. Market participants carefully analyze these processes. They analyze data on inflation, trade balances, output and many other indicators. This is called fundamental analysis.

One factor affecting exchange rates between two countries is the trade balance. By definition, the merchandise trade balance is the net difference between the value of merchandise being exported and imported into a particular country. For example, consider the exchange rate for Euros against us dollars. The United States imports products from Europe. To pay for them, Americans need Euros; therefore, the U.S. companies trade the U.S. dollar for Euros. On the other hand, because Europeans desire American-made goods, they purchase U .S. dollars to pay for U .s. goods. The American demand for European goods and services contributes to the demand for Euros while European purchases of American goods and services contribute to the demand of U .s. dollars. In this case, the net difference between American purchases of European goods and services, and European purchases of American goods and services, is the merchandise trade balance between the two countries.

In the near term, these capital flows are greatly influenced by yield differentials. All else being equal, the higher the yield on European securities compared to American securities, the more attractive European securities are relative to American securities. An increase in European yields would tend to raise the flow of U .S. dollars into European securities as well as decrease the outflow of Euros to American securities. Combined, this increased flow of funds into Europe would lower the value of the U.S. dollar and increase the value of the Euro; therefore, the Euro to U .S. dollar ("EUR/USD") ratio, as it is represented in the Forex market, would increase.

The rate of inflation is another factor influencing currency exchange rates. The currency from the lower inflation country rises in value, while the currency from the higher inflation country falls in value. Both the inflation factor and the purchasing power of the currencies directly impact currency exchange rates.Another type of analysis used in foreign currency trading ( as well as
many other financial markets) is technical analysis. Price graphs are used in this analysis.

Three premises, on which the technical approach is based:

1 prices move in trends
2 history repeats itself
3 market actions/events discount everything

The last statement reminds us that action taken in the marketplace or unforeseen global events make technical analysis less useful until stability returns.

Many factors are affecting the FX market everyday. They may be political developments, natural disasters, or just rumors of such. Market participants react to these developments seeking to protect their money. Thus, unexpected, and even dramatic moves occur in this market at times. That is why often the very expectation of a certain development can influence the market more than the event itself. It is for this reason that the currency market is never in equilibrium, and its
behavior can be defined as the perennial quest for an ever-elusive equilibrium. .

The FOREX market is the worlds largest financial market. Why is it so attractive? Let us consider the principal reasons:

1 Liquidity*. Over a trillion dollars a day in foreign currencies are traded, with hundreds of thousands of people trading, and millions of transactions executed daily. That is why you have the opportunity to enter and exit the market at any time.

2 Uninterrupted operation. The market operates around the clock, except for Saturday and Sunday. While one trading center is closing another is opening. Business hours overlap around the world to create the 24-hour market. It opens with the start of the workday on Monday in Sydney and then moves around the world, from one time belt to another until its closure on Friday in the USA.

3 Predictable market. In one sense, the FOREX market is quite predictable. Currency price curves exhibit certain regularities, creating, what is known in technical trading, as price trends. These price trends increase your chances of trading profitably.

4 Accessibility .The market is accessible from any point where there is a phone or access to the Internet.

* Under normal market condition.