fbpx
  • What is Forex

    Forex is short for ‘foreign exchange’ also referred to as FX. This is currency trading which is where a speculator looks to profit in the movement of one currency relative to another. Trading Forex. Around $5.1 trillion is traded on the global foreign exchange market in any one day.

    Unlike shares in companies, the vast majority of FX trading doesn’t take place on an exchange or even in a single location. Instead, there is an ‘Interbank’ market where large institutions electronically publish their dealing spreads for specific currency pairs. This is also known as ‘Over the Counter’ or OTC. These Interbank dealers are in open competition with each other and also trade for themselves and on behalf of their clients. As a consequence, the prices of the FX pairs are constantly changing depending on order flow and changes in underlying financial conditions.

    * The exception is currency futures and options which make up a relatively small proportion of daily trade

    Who trades in the forex markets? The sheer size of the forex market attracts a vast number of market participants. They can range from financial institutions (such as international and central banks), to governments and large companies, as well as private traders and investors. Why trade forex? Currency prices can be highly sensitive to a large number of political, social and macroeconomic factors. Examples include interest rates, inflation, foreign trade and political instability to name a few. These factors contribute to the fluctuation of currency prices, allowing speculators the opportunity to profit from these price movements. Forex also offers significant benefits which make it an attractive market to trade.

    1. Forex is a 24-hour market Forex trading occurs 24 hours per day, from Sunday night to Friday night. This is possible because forex trading is structured differently from other asset classes like shares or commodities.

    For example, while share trading is mostly conducted through highly regulated exchanges (like the NYSE), forex trading is not. Instead, forex trading takes place through an electronic network of global banks, otherwise known as an over-the-counter (OTC) market. As the OTC market has no central location, market participants do not have to wait for an exchange to open in order to trade. This allows them to take advantage of currency moves across the globe, 24 hours a day.

    2. Use of margin Margin trading allows a trader to enter a position using a small proportion of its overall value. This provides ‘leverage’ and allows profits to be magnified if the market moves in the desired direction. It also means losses are magnified if the market moves in the opposite direction.

    3. Forex is a highly liquid market Due to the high number of market participants and trading activity, forex is the most liquid financial market in the world. This means it is relatively easy to enter and exit a position. The major benefit of the sheer size and liquidity of the forex market is that it is almost impossible for one participant to manipulate it for long. It is said that this is how the forex market self-regulates.

  • arrow