THE FOREIGN EXCHANGE MARKET
The Forex market is where banks, businesses, governments, investors and traders return to exchange and speculate on currencies. The Forex market is additionally referred to as the ‘Fx market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it's the biggest and most liquid market within the world with an average daily turnover of $3.98 trillion.
The Fx market is open twenty-four hours every day, five days per week with the most vital world commercial centres being situated in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.
It ought to be noted that there's no central marketplace for the Forex market; trading is instead conducted ‘over the counter’; it’s not like stocks where there's a central marketplace with all orders processed just like the stock exchange. Forex may be a product quoted by all the major banks, and not all banks can have the exact same value due to delay in servers. Now, the broker’s platform take all these feeds from the various banks tied with them and therefore the quotes we see from our broker are approximate average of them. It’s the broker who is effectively transacting the trade and taking the opposite side of it, they ‘make the market’ for you. when you get a currency pair…your broker is marketing it to you, not ‘another trader’.
In 1876, something called the gold exchange standard was implemented. Basically, it said that all paper currency had to be backed by solid gold; the idea here was to stabilize world currencies by pegging them to the price of gold. It was a good idea in theory, but in reality, it created boom-bust patterns which ultimately led to the demise of the gold standard.
The gold standard was dropped around the beginning of World War 2 as major European countries did not have enough gold to support all the currency they were printing to pay for large military projects. Although the gold standard was ultimately dropped, the precious metal never lost its spot as the ultimate form of monetary value.
The world then decided to have fixed exchange rates that resulted in the U.S. dollar being the primary reserve currency and that it would be the only currency backed by gold, this is known as the ‘Bretton Woods System’ and it happened in 1944. In 1971, the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods System.
It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange market, although it did not become widely electronically traded until about the mid-1990s.
Forex trading as it relates to retail traders (like you and I) is the speculation on the price of one currency against another. For example, if you think the euro is going to rise against the U.S. dollar, you can buy the EUR/USD currency pair low and then (hopefully) sell it at a higher price to make a profit. Of course, if you buy the euro against the dollar EUR/USD, and the U.S. dollar strengthens, you will then be in a losing position. So, it’s important to be aware of the risk involved in trading Forex, and not only the reward.we can take advantage of the high leverage and volatility of the Forex market by learning and mastering and effective Forex trading strategy, building an effective trading plan around that strategy, and following it with ice-cold discipline. Money management is key here; leverage is a double-edged sword and can make you a lot of money fast or lose you a lot of money fast. The key to money management in Forex trading is to always know the exact dollar amount you have at risk before entering a trade and be Ok, with losing that amount of money, because any one trade could be a loser.
• Who trades Forex and why?
Banks – The interbank market allows for both the majority of commercial Forex transactions and large amounts of speculative trading each day. Some large banks will trade billions of dollars, daily. Sometimes this trading is done on behalf of customers, however much is done by proprietary traders who are trading for the bank’s own account.
Companies – Companies need to use the foreign exchange market to pay for goods and services from foreign countries and also to sell goods or services in foreign countries. An important part of the daily Forex market activity comes from companies looking to exchange currency in order to transact in other countries.
Governments / Central banks – A country’s central bank can play an important role in the foreign exchange markets. They can cause an increase or decrease in the value of their nation’s currency by trying to control money supply, inflation, and (or) interest rates. They can use their substantial foreign exchange reserves to try and stabilize the market.
Hedge funds – Somewhere around 70 to 90% of all foreign exchange transactions are speculative in nature. This means, the person or institutions that bought or sold the currency has no plan of actually taking delivery of the currency; instead, the transaction was executed with sole intention of speculating on the price movement of that particular currency. Retail speculators (you and I) are small cheese compared to the big hedge funds that control and speculate with billions of dollars of equity each day in the currency markets.
Individuals – If you have ever travelled to a different country and exchanged your money into a different currency at the airport or bank, you have already participated in the foreign currency exchange market.
Investors – Investment firms who manage large portfolios for their clients use the Fx market to facilitate transactions in foreign securities. For example, an investment manager controlling an international equity portfolio needs to use the Forex market to purchase and sell several currency pairs in order to pay for foreign securities they want to purchase.
Retail Forex traders – Finally, we come to retail Forex traders (you and I). The retail Forex trading industry is growing everyday with the advent of Forex trading platforms and their ease of accessibility on the internet. Retail Forex traders access the market indirectly either through a broker or a bank. There are two main types of retail Forex brokers that provide us with the ability to speculate on the currency market: brokers and dealers. Brokers work as an agent for the trader by trying to find the best price in the market and executing on behalf of the customer. For this, they charge a commission on top of the price obtained in the market. Dealers are also called market makers because they ‘make the market’ for the trader and act as the counter-party to their transactions, they quote a price they are willing to deal at and are compensated through the spread, which is the difference between the buy and sell price .
Advantages of Trading the Forex Market: • Forex is the largest market in the world, with daily volumes exceeding $3 trillion per day. This means dense liquidity which makes it easy to get in and out of positions. • Trade whenever you want: There is no opening bell in the Forex market. You can enter or exit a trade whenever you want from Sunday around 5pm EST to Friday around 4pm EST. • Ease of access: You can fund your trading account with as little as $250 at many retail brokers and begin trading the same day in some cases. Straight through order execution allows you to trade at the click of a mouse. • Fewer currency pairs to focus on, instead of getting lost trying to analyse thousands of stocks • Freedom to trade anywhere in the world with the only requirements being a laptop and internet connection. • Commission-free trading with many retail market-makers and overall lower transaction costs than stocks and commodities. • Volatility allows traders to profit in any market condition and provides for high-probability weekly trading opportunities. Also, there is no structural market bias like the long bias of the stock market, so traders have equal opportunity to profit in rising or falling markets. While the forex market is clearly a great market to trade, I would note to all beginners that trading carries both the potential for reward and risk. Many people come into the markets thinking only about the reward and ignoring the risks involved, this is the fastest way to lose all of your trading account money. If you want to get started trading the Fx market on the right track, it’s critical that you are aware of and accept the fact that you could lose on any given trade you take.
• Why is the Forex market so popular?
Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not easy to get there, but if you are determined and disciplined, you can make it happen.
Here’s a quick list of skills you will need to reach your goals in the Forex market:
- Ability – to take a loss without becoming emotional
- Confidence – to believe in yourself and your trading strategy, and to have no fear
- Dedication – to becoming the best Forex trader you can be
- Discipline – to remain calm and unemotional in a realm of constant temptation (the market)
- Flexibility – to trade changing market conditions successfully
- Focus – to stay concentrated on your trading plan and to not stray off course
- Logic – to look at the market from an objective and straight forward perspective
- Organization – to forge and reinforce positive trading habits
- Patience – to wait for only the highest-probability trading strategies according to your plan
- Realism – to not think you are going to get rich quick and understand the reality of the market and trading
- Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the market at all times
- Self-control – to not over-trade and over-leverage your trading account