ForexBall education: Forex Market Overview

Author Haresh Menghani Category Trading Articles 18 Jun 2015 Updated at 08:52 CET

What is the Forex market?

The Foreign Exchange Market – or Forex for short - is a market where various market participants buy and sell currencies, i.e. currency trading is conducted. In traditional sense, it is not a market because there is no central marketplace and it is said to be 'over the counter' market. The forex market operates 24 hours a day, 5 days a week and it is the most liquid financial market in the world with an average daily turnover of over USD 5 trillion..

What is Forex trading?

The basic mechanisms of trading in the Forex market are similar to those in other financial markets and are centered on the basic concept of buying and selling. The only difference is that buying one currency is associated with selling another currency simultaneously.
 
Since there is a simultaneous exchange of currencies, the value of one unit of a currency is represented in terms of its value in relation to one unit of another currency. This is the reason why currencies are always quoted in pairs, like EUR/USD or USD/JPY.
 

Most Traded currencies

Amongst over 100 currencies from all across the world, the major currency pairs constitute almost 75% of the daily trading volume of the Forex market.
 
In the table below you can see the major currency pairs that make up the majority of trades in the market and their respective symbols and nicknames widely used in the Forex market:
 
Major Currency Pair Symbol Nickname
Euro vs. US Dollar EUR/USD Fiber
US Dollar vs. Japanese Yen USD/JPY Yen / Ninja
British pound vs. US Dollar GBP/USD Sterling / Cable
US Dollar vs. Swiss franc USD/CHF Swissy
US Dollar vs. Canadian Dollar USD/CAD Loonie
Australia Dollar vs. US Dollar AUD/USD Aussie
New Zealand Dollar vs. US Dollar NZD/USD Kiwi
 
Remember that, while quoting currencies, the individual currency symbols are used instead of full names of currencies. Traders in the Forex market prefer to call the currency pairs by their nicknames rather than by their symbolic nomenclature.
 

Main participants of the Forex market

Basically, the forex market is where banks, central banks, commercial companies, individual investors, traders and brokers participate to exchange and speculate on currencies.
 
Banks – Commercial and investments banks are the biggest players on the forex market. They participate in the currency market for hedging and speculative purposes both as proprietary traders and as service providers for their customers.
Central Banks / Governments – Governments and Central Banks intervene in the Forex market to control the money supply by using their forex reserves in an attempt to stabilize the market and achieve their economic goals (inflation, growth, interest rates, etc.).
Commercial Companies – Large businesses need to convert huge amounts of currencies when they trade outside their home country. Another reason why a commercial company might participate in the forex market is to hedge its exposure so that the price fluctuations do not affect future foreign currency payments or receipts.
Retail Forex Traders – As various forex trading platforms can easily access the Internet, individuals access the Forex market either through a broker or a bank to benefit from the currency movements . Individuals may also want to exchange currencies to pay for goods and services purchased during their visit to a foreign country or via the Internet and whenever they deal with any foreign investment.
Other Financial Institutions – International investment firms like pension and mutual funds, arbitrage funds and brokerage companies participate in the Forex market to facilitate transactions, speculate and hedge their investments in foreign securities.
   

Advantages of Trading in the Forex Market

Market Hours – Since the forex market operates 24 hours a day and 5 days a week, one of its biggest advantages is  flexibility – you can trade whenever you want.
High Market Liquidity – The forex market has the highest liquidity amongst all the financial markets in the world. Higher liquidity ensures price stability and opening or closing a position at a fair market price without high price discounts.
High Leverage – Leverage lets you trade more money on the market keeping your risk capital at minimum. Thus, leverage makes it possible to use your invested funds more efficiently by trading larger positions. For example, at 1:50 leverage one can control a trade of $50,000 on the market using only $1000 of capital. Leverage can increase the potential returns but it can also increase the potential losses, if the trader is wrong. Leverage in the forex market could extend up to a proportion of 1:500.
Low Transaction Cost – The forex market is considered to be one of the most cost-effective means of trading. Usually the cost of a transaction is the spread, i.e. the difference between the buying and the selling price.
Lower Starting Cost – The forex market does not require a lot of capital to get trading started, which helps you to walk through the market before you start risking a larger amount of capital.
Profit Potential – In the forex market, it is possible to gain in rising markets (also called bull markets) as well as in falling markets (also called bear markets). Using proper trading strategies, traders can make profits by either buying an asset or by short-selling it.
 

Final Word

Forex trading could really be exciting but it is also important to be aware of the risk involved, so it may not be suitable for everyone. The best way to avoid high risks is to equip yourself with the proper knowledge about the forex market and use a demo account for trading before risking real money. With the widespread use of the Internet, it is easy for a person to learn Forex trading, open a trading account and start trading in a relatively short span of time.

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