What is Forex ? Understanding Forex Market
The foreign exchange market or forex is the biggest financial market in the world. It does not receive as much media attention as other markets, but there are over $4 trillion worth of transactions every day. Put simply, foreign exchange market lets you buy and sell money.
It is the market in which currency is traded between countries. There is no single market location. Currency trade is conducted between major financial centers 24 hours a day, five days a week.
The major centers are London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. During the week, any time of day, there is a market open that is buying and selling currency. With improving tech dealing in currency has become accessible to even novice traders. All you need now is access to the internet.
How is the Foreign Exchange Market different from other Markets ?
- Lesser Rules : Currency trade does not occur on any central exchange with rules to govern it. There is no central governing body over-looking it. Unlike the trading of stocks, futures or options, currency trading does not take place on an exchange with rules, like the New York Stock Exchange.
- Commission-less : The fx market has no exchange, brokerage or clearing fees. Brokers make a profit on the difference in price you pay to buy or the amount you receive when you sell.
- Trade Anytime : Fx markets are open 24 hours a day, so you can set your own schedule.
- Limitless : Whether you want to sell $1 million or 1$ billion, you can. There are no limits on how much you can buy or sell.
- Easy In, Easy Out : Buying and selling currency is instantaneous. With such a large market, you will never get stuck with a stockpile of currency and entering the market is as easy as exchange your money for another currency.
How to Make Money by Trading Forex ?
Profit can be made by converting money into a different currency and hoping it increases in value. Ideally, when you convert back you have more money than you started with.
For example, you can start with $900 dollars US and exchange it at a rate of 0.9 for $1000 Canadian. Then if the exchange rate changes to 1.0, you can trade your $1000 Canadian for $1000 US. In this manner, you have made a profit of $100 US.
What are you really buying and selling ?
In the foreign exchange market, you are actually buying and selling money. When you exchange you buy currency, you are betting that the currency will increase in value. If it does, then you can sell it for a profit.If you are selling a currency you are betting that it will decrease in value.
Currency is traded in currency pairs like the US dollar and the Canadian dollar (USD/CAD) or the US dollar and the Japanese yen (USD/JPY). You are not actually buying anything physical. Instead the money you have is exchanged for the currency you want. No physical alteration of money ever takes place.
Think of it like buying and selling publicly traded shares of a company, it all happens inside your computer. However, there is no central exchange; instead it is a network of markets between the banks. A good way to think about it is like buying shares in an entire country’s economy.
How is Currency Quoted ?
Currencies are quoted in pairs. The first currency in the pair is called the base currency. The second currency is called the quote currency. The number of the quote is the exchange rate from the quote currency into the base currency or how much of the quote currency is needed to purchase one unit of the base currency.
This means that if the USD/EUR is quoted at 0.8 then for every 0.8 Euros sold you would receive $1 US. In this case the inverse would be EUR/USD and quoted at 1.25. So every $1.25 would receive 1 euro.
Which Currency are the Most Traded Pairs ?
Some traders do deal in more exotic currency like the Thai baht or the Czech koruna. However, most traders stick to the seven majors.
Of the seven majors the four most popular are: EUR/USD(euro/dollar), USD/JPY (U.S. dollar/Japanese yen), GBP/USD(British pound/dollar), and USD/CHF (U.S. dollar/Swiss franc).
The less popular pairs are: AUD/USD (Australian dollar/U.S. dollar), USD/CAD (U.S. dollar/Canadian dollar) and NZD/USD(New Zealand dollar/U.S. dollar)
More than 95% of forex trading occurs in these seven pairs. The fx market is much less broad than other markets. There are only 18 actively traded pairs.
How Forex Trades takes Place ?
Forex trades occur through brokerages. The broker acts as an intermediary between the currency buyer and seller. It is possible to buy and sell directly through a bank, but brokers off suites of tools that can increase the trader’s success.
Tools offered by brokers include charting platforms, analysis tools and access to leverage. When you place an order through your account, the broker sends the order to the Interbank Market to fill. This Interbank is actually a network of traders and banks that deal specifically with currencies.
While brokers fill a valuable role for the average currency trader there are costs and fees associated with maintaining an account similar to any regular stock broker.
Today, there are an increasing number of forex brokers in the market. New traders should take care when selecting a broker as the forex market is less regulated than other markets.
Like any brokerage, forex brokers will often offer advice and guidance when navigating their market. Once a trader has confidence in their broker it is easier to focus on trading strategies. This will greatly increase the chance of being successful in the forex market.
What Moves A Currency ?
Valuing a company may be hard, but try valuing an entire country. Fundamental analysis of forex can yield long term trends, but it is very complex work. Some traders do trade in the short term, but they can base their predictions only on new releases.
Here are some fundamental indicators of currency value: Non-farm payrolls, Purchasing Managers Index (PMI), Consumer Price Index (CPI), Retail sales, and Durable Goods.
Along with these fundamentals there are a variety of meetings that take place to discuss things like interest rates, inflation and other issues. These meeting can heavily influence currency valuation. Even the choice in wording form financial institution press releases can cause market volatility.
So next time you see turbulent times in one country or another think about how it will affect that countries currency value and realize how much money forex traders are making.
Also you should start keeping a calendar highlighting important dates like the release of fundamental reports or see if your broker provides real-time access to this information.