The Forex market, or foreign exchange, FX or sometimes referred to as the currency market is a global exchange for international currencies. It is these markets and the buying and selling of exchange pairs, otherwise known as currency pairs that determine the valuation placed on worldwide currencies. Obviously there are many factors that determine whether a currencies value increases or decreases. For example, the demand of one currency can mean that there is a demand for products or services from that country of origin. Some currencies are also purchased and held in reserve; usually the US Dollar, UK British Pound Sterling and the Swiss Franc. Certainly if that currency value is placed at a low from it's normal historic average, it is usually common to see an increase in buying currencies at lower historic values, this helps with those looking at international trade, to secure a better price for importing goods and services from the currencies country of origin. Large corporations do this, to maintain price consistency with manufacturing etc.
The Foreign Exchange market is the largest financial market in the world, with an incredible average daily turnover of $4 Trillion US Dollars. This is increasing almost daily, as the FX market becomes more popular, not just as a means of Intermarket global trading, but as a form of speculation amongst those trading the market. In fact, there has in the last 10 years been an enormous boom in 'retail trading' in the forex market. Certainly the last 5 years, this area of speculation amongst traders has grown to never before seen levels. The attraction being the markets high liquidity, it's open almost 24 hours per day and that it's a market that is seen as a trending market - going in one direction or another, for periods at a time. Most trade the Forex market, do so on a very short term basis, days at most, rarely weeks. Some trade intraday, where they have positions that are open for hours, if not minutes.
The list of those trading in the forex market is one of the most varied of any of the financial markets; central banks, currency speculators, international corporations, governments, institutional investors, large banks and retail investors as discussed above. More information on the market participants will be added in further articles.
The main centres of trade in the forex market are the UK which accounts for over 36% of forex transactions, followed by the US coming on for 18% and coming third Japan, accounting for just over 6% of all forex trade transactions. Transactions in the forex market have more than doubled in less than 10 years, at the time of writing this in 2012. Given it's ease of access for 'retail traders' and the growing demand for international trade and international speculation, this is unlikely to fall anytime soon.
One of the unique things with the forex market, is that there is no centralized hub for clearing transactions, say as we have become accustomed to see with the stock markets, who have main exchanges in leading major cities such as London and New York for instance. This is because the forex uses what is known as Over-the-counter (OTC) trading, which allows for a number of interconnected markets from all over the World, where differing currency derivatives are traded. There simply is no single exchange for the forex market, although some countries as detailed previously, are becoming known market trading centres in forex, namely; London, New York and Tokyo. Simply because of their dominance in the amount of trading taken place in these major cities. Because of London's dominance overall it is usually the London quote on currencies that is provided worldwide.
Currencies are traded in pairs against one another. The main currency pairs are as follows; EUR/USD, USD/JPY, GBP/USD. The first currency quoted is the main currency converted into the following currency. For example; EUR/USD, is the conversion of one Euro to one US Dollar. Therefore, if you expect the price of the Euro to increase against the dollar, you would go 'Long' (see Financial Trading 101) on the EUR/USD. Conversely, if you expect the Dollar to increase in value against the Euro, you would go 'Short' on the EUR/USD. Quotes on currencies are given as follows 1.5432 = for example USD $1.54 (32 fractions of a cent - 100 making one whole cent). A single move is known as a pip. Given the forex markets are incredibly liquid, trading is instant, almost, and some currency pairs at certain times can be incredibly volatile. This can mean massive movements in pips, meaning that it is possible to make large numbers of money and also equally lose large numbers of money too. What is interesting, is that the USD was used as a basis for a currency quote in over 84% of transactions.
In further articles on this website I will cover some of the thinking behind what makes the Forex market move and what drives this. I will then provide trading tutorials on trading the forex using financial spreads, as well as good assortment of techniques and methods that you can use to benefit from trading in the forex. Also, if you're interested in trading the forex market directly, we will be producing a separate website, focusing just on the forex market - this will come in time, but for now, for those of you interested in forex, I would in fact advise that at first you start trading using an easier to understand product, such as financial spread betting, rather than jumping right into the forex market, certainly if you are new to trading.
The important thing to understand, is that to learn about trading, you have to start by learning the market you are entering, learning the product that you are going to use to trade that market and then start to develop skills in trading that market, using technical analysis. All of which, you will find on this website. Then when you have become proficient in trading using financial spreads in the forex market, then and only then think of moving directly into the forex market.
One note to my American cousins. Sadly, you are not able to trade in financial spreads in the US. Which is unfortunate. However, if it's strictly the Forex market that you want to become involved in, then you can still use the same methods and techniques that I will cover on this website. Just make sure that you use a demo account, so you get a good feel of how things work. There will be more information of the best places to get a good demo account, which are free, will be covered in another article soon.
As I have said above global foreign exchange market is the largest market in the world with more than $4 trillion daily turnover, this surpasses the combined turnover of the world's stock and bond markets. The high liquidity, competitive price quotes, on-line trading, accessible research and news has made Margin Forex (FX) trading the growth retail trading product and has made the trading of foreign currencies more accessible to the trading investor. Some of the major driving forces behind currency fluctuations are interest rate differentials, inflation, government policies, economic situation and technical analysis perspective.
Margin Forex gives an investor the opportunity to trade over 100 foreign exchange currencies on a margined basis as opposed to paying for the full value of the currency with leverage up to 50 times the currency value, twenty four hours a day-seven days a week. With low dealing costs, transparent driving forces and dynamic movements makes Margin FX an attractive trading product for the savvy investor.
With the currency markets constantly moving, there are always trading opportunities, whether`a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the US dollar gets stronger against the Euro and vice versa. So, if you think the EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your profits. The opposite trading scenario would occur if the EURUSD appreciates.
Note: The risk of loss in trading in derivatives and/or leveraged products can be substantial. A client should carefully consider whether trading such products is appropriate for them in light of`their financial circumstances and objectives.
Margin FX transactions are over-the-counter ('OTC') derivatives. 'Foreign exchange' generally refers to trading in foreign exchange currencies in the spot (cash) markets and is known as the physical. Whereas Margin Forex allows the investor an opportunity to trade foreign exchange on a margined basis as opposed to paying for the full value of the physical currency. Basically, there is no physical delivery of the currency, trades are cash adjusted or cash settled. In other words, investors are required to lodge funds as security (initial margins-normally 2% of transaction value for majors) and to cover all net debit (ie loss) adverse market movement (variation margins). Trades are monitored on a mark-to-market basis to account for any market movements on open positions. When clients are making a loss to an extent that they no longer meet the margin requirements they are required to 'top up' their accounts or to 'close out' their position.
Foreign exchange is essentially about exchanging one currency for another at an agreed rate. Accordingly, in every exchange rate quotation, there are two currencies. The exchange rate is the price of one currency (the 'base' currency) in terms of another currency (the 'terms' currency) such as the price of the Australian dollar in terms of the US dollar. For example, if the current exchange rate for the Australian dollar as against the US dollar is AUD/USD 0.7000, this means that one Australian dollar is equal to or can be exchanged for 70 US cents.
The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.
