About Foreign Exchange Trading

The foreign exchange market, also known as the forex or FX, is an exchange much like the New York Stock Exchange, but instead of trading currency for stock in a public company, currency of one nation is exchanged with an equal amount of currency from another nation. It is largest financial markets in the world, and is growing larger every year - it is estimated that forex volume rose 41% from 2007 to 2008 alone.

Significance

There are a wide variety of things that effect the exchange rates of the world's currencies, and therefore the market factors on the forex market.
Government budget surpluses or deficits can effect the value of a national currency, with deficits driving the value down and surpluses increasing it. National trade levels and trends also effect national currency, with a trade deficit having a negative effect and vice versa. High inflation will typically devalue currency, though this can sometimes raise the value of a currency when speculators expect that countries' central bank will lower interest rates.
Geopolitical conditions can also effect the value of currency. Social unrest or upheaval will devalue a currency, where as the rise of a political party that is perceived as fiscally sound might increase that currencies' value.

Types

Spot Transactions are a two-day delivery transaction, which represents a direct exchange of two currencies in the market. This trade represents the shortest time frame of any action that can be taken on the forex market.
Forwards is also known as a Forward Contract, a transaction in which currencies do not change hands until an agreed upon date. A buyer and seller agree to exchange currencies at an agreed upon rate and do so at the agreed upon date, regardless of what the exchange rates are on that day.
Forex Swaps are also known as a currency swap. This is the most common type of exchange on the forex market. Two parties exchange currencies and re-exchange the currencies later at an agreed upon date.
Option is a derivative in which the owner has the right to exchange money in one currency into another at a pre-agreed date and rate.

Geography

Though many, many nations and institutions around the world are represented at and trade on the forex market, London is recognized as the honorary global center for the market. This is because, at around 1.4 trillion USD, or 34%, in daily trading volume, London is the geographical site of the largest section of forex trading. Barclays Capital, the Royal Bank of Scotland, and HSBC all trade on the forex market out of London. The Deutsche Bank, based in Germany, accounts for the next largest section at around 22% of the market volume (making it the number one institution by volume on the forex market). JPMorgan and Citi Bank account for about 12% of market volume out of the U.S.

Identification

There are a number of institutions and organizations that regularly participate in forex market trading. Very few individuals participate in forex trading, as the low profit margins typically seen in the market require very large trades to see any kind of real profit.
Banks, especially large banks, are regular participants in forex trading. Some of this trading is done for the benefit of the bank's customers, but the majority is done to augment the balance sheets of the bank itself.
Commercial companies often must use foreign currencies to pay for needed goods or services. However, these trades typically account for only a small percentage of the market.
Investment management firms often use the forex to facilitate trading of foreign assets.They also manage a large number of hedge funds, which often draw a portion of their trading action from the forex market.

Size

The forex is a unique trading market among the global community. Average daily turnover (the value of the currencies that exchange hands) is nearly 4 trillion USD every day. As recently as 1988, the forex was as "small" as 500 billion USD, but it has grown in the years since and continues to grow at a staggering pace. The daily volume includes just over 1 trillion USD in spot transactions, 362 billion USD in outright forwards, 1.7 trillion USD in forex swaps, and 129 billion USD in reported gaps.

Theories/Speculation

It is argued by some that currency speculation, i.e. the assumption of risk in return for the chance of gain (forex trading), can have a destabilizing effect on the value of national currencies and potentially devalue them. Others argue that speculators (forex traders) are, in fact, a stabilizing force on the world's currency markets by making the transferral of risk from those who don't want to bear it to those who do, though still others rebut that this is an exercise in politics than economics.
Currency speculation is often regarded as nothing more than gambling for profit by many countries, instead of a contributing to positive economic growth like traditional investments suck as stocks. When a financial bubble or other unsustainable force surfaces in the economy of a particular country, forex trading often leads to the collapse of the bubble. It is debatable whether this causes harm to the country in question, or helps in the long run by exposing questionable financial practices sooner.