What is Forex?
About Forex
Forex refers to currencies such as the US dollar, Japanese Yen, Pound, and Euro. The forex market is a market or exchange where currencies are traded like other securities such as stocks and commodities. This just happens to be the world’s largest financial market, with a trading value of over $4 trillion a day. Forex, FX, or Foreign exchange are terms commonly used to refer to the market.
The Forex market is considered an Over-the-Counter (OTC) or ‘Interbank’ market because this market is run electronically through a network of banks, continuously over a 24-hour
period. The forex market is highly volatile, offering good trading opportunities which increase the prospects of earning good profits, while also indicate the potential for large
losses.
There are number of major financial centers in which the Forex market is particularly active, including New York, London, Tokyo, Singapore and Hong Kong.
What is traded in FX Market?
In the Forex market, currencies of various countries are bought and sold. But remember, you don’t actually buy or sell actual currencies, you actually trade in currency pairs
where you ‘plus’ (long, increase holding) one currency and ’minus’ (short, decrease holding) the other. For instance, the US dollar with the Swiss Franc (USD/CHF) or the British pound with the Japanese Yen (GBP/JPY).
Who trades in the FX Market?
The main participants in the forex market are Central and Commercial banks, hedge funds, institutional investors and individual investors. Banks are considered for the most part, the market makers in the FX market. Banks gives two way quotes to traders, meaning they provide both a ‘bid’ and ‘ask’ price.
Speculators, Hedgers and Arbitrageurs enter the market for typically different reasons. For instance, hedgers take forex contracts to safeguard their existing corporate finance
position, while on the other hand, arbitrageurs participate in the market to take the advantage of price differences. Over 95% of the forex market activity is estimated to be
for speculative purpose; this helps in providing substantial liquidity.
Why trade Forex?
- 1. 24 hour Market – Forex markets are virtually non-stop, meaning that forex trading continues 5 days a week, 24 hours a day, as some exchange around the world is always open. This is good particularly for those who are not regular traders but want to trade whenever they are free.
- 2. Leverage – Leverage is the main advantage in the forex market; brokers provide so much leverage, sometimes even 50X or 100X, which aids traders in taking large positions
without actually betting in cash. Remember, that leverage is a double-edged sword!
- 3. High Liquidity – The forex market is highly liquid and helps in providing comfort to exit a trade at any time without having to worry about having adequate buyers and sellers in the market.
- 4. Less Transaction cost – Transaction cost is very low in the FX market, compared to other markets such as equities and commodities. There is no third party or middleman involved in the forex market, which helps in saving on cost of trading.
- 5. Not easy to operate – The Forex Exchange market is so large and complex, it cannot easily be manipulated by a single entity due to the large volumes and high amount of liquidity. It is not easy to inflate market prices as in equities or commodities.
