Written by: Sophie May
The Foreign Exchange (Forex) Market is the largest financial market in the world, and can witness up to $2 trillion of trading in a single day. Established in 1971, and open 24 hours a day, this is where banks and investors exchange currencies. Unlike the stock and futures markets, trading is never centralized on an exchange, but is always conducted between two counterparts over the telephone or internet.
Investors trade a pair of currencies. The second currency, known as the quote, refers to the amount of that currency which can be bought with one unit of the first currency, known as the base. The major currencies are the US Dollar, the Euro, the Japanese Yen, the British Pound and the Swiss Franc. The Canadian Dollar and the Australian Dollar can also be traded on the forex market, but only against the USD. They are not considered to be major currencies due to their limited volume.
Traders assume one currency to go up against the other, or vice versa, and can buy or sell to profit from the changes in value. For example, if a trader believes that the US Dollar will gain in value against the yen, because the dollar will go, or because the yen will go down, or both, he may call the USD/JPY pair. Traders may take positions in response to economic, social and political events as they occur, or in response to long-term and charted trends.
The traditional forex market can be difficult and volatile. Newer traders in particular can be caught out by spreads, the price difference between buying and selling, and by the risks associated with account leveraging. Binary options trading eliminates these factors and so has become popular among those who want to involve themselves in the trading world and profit from the economic effects on currencies, without added complications. Forex binary options use currency pairs as their underlying asset. Traders profit by simply predicting the direction of the pair.