Forex Market Basics
Last updated on April 6th, 2015
Forex, FX and the Forex market are some common abbreviations for the Foreign Exchange market. Actually it is the largest financial market in the world, where money is sold and bought freely.
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Here are some Forex Market Basics: In its present condition the Forex market was launched in the seventies, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from demand and supply.
As far as the freedom from any external control and free competition
are concerned, the Forex market is a perfect market.
With a daily turnover of over trillions of dollars, the Foreign Exchange market conducts more than three times the aggregate amount volume of the United States Equity and Treasury markets combined. The Forex market is an over-the-counter market where buyers and sellers conduct foreign exchange business using different means of communication.
Where Is The Forex Exchange
Unlike other financial markets, the Forex market has no physical location or central exchange. Since the Forex market lacks a physical exchange, the market trades continuously on a 24-hour basis, moving from one time zone to the next, across each of the world’s major financial centers every day. Trillions of dollars of foreign exchange activity takes place every day.
From 1997 to the end of 2000, daily Forex trading volume surged approximately from US$5 billion to US$1.5 trillion and more (according to various recent studies it has touched $1.7 trillion per day and dwarfs all other markets for trading in size and volume).
It is really difficult, if not impossible; to determine an absolutely exact number because trading is not centralized on an exchange.
But one thing is for sure that the Forex market continues to grow at a phenomenal rate.
Designed For Big Players
Before the advent of Internet and e-commerce, only big corporations, multinational banks and wealthy individuals could trade currencies in the Forex market through the use of the proprietary trading systems of banks. These systems required as much as US$1 million to open an account.
Thanks to advancements in online technology, today investors with only a few thousand dollars can have access to the Forex market 24 hours a day and around 5 ½ days of a week.
The Forex market is a nonstop cash market where currencies of nations are traded, typically via brokers called forex brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets while traders increase or decrease value of an investment upon currency movements.
Foreign exchange market conditions can change at any time in response to real-time events so it is also considered to be a highly volatile and fragile market too. Conditions of the Forex market never remain the same they changes every second.
The Big Daddy Of Trading
The foreign exchange market dwarfs the combined operations of the New York, London, and Tokyo futures and stock exchanges. According to its size and scope it is many times larger than all other markets.
Stats shows that spot transactions and forward outright Forex trading take place in the inter-bank market. 51% of the market is in spot Forex transactions, followed by 32% in currency swap transactions. Forward outright Forex transactions represent another 5% of this daily turnover, with options on ‘interbank’ Forex transactions making up another 8%.
Therefore the inter-bank market accounts for 96% of the global foreign exchange market, with the remaining 4% being divided among all the global futures exchanges.
For traders, Forex trading provides an alternative to stock market trading. While there are thousands of stocks to choose from, there are only a few major currencies to trade (the Dollar, Yen, British Pound, Swiss Franc, and the Euro are the most popular).
Forex trading also provides a lot more leverage than stock trading, and the minimum investment to get started is a lot lower. Add to that the ability to choose flexible trading hours (forex trading goes on 24 hours a day) and you have the reason why so many stock traders have flocked to day trade currencies.
Why The Forex Market Is Attractive To Trade
One of the major reasons why is because you get a lot more in the way of price action in the foreign exchange market than you do in the equity markets were even in the debt markets.
The reason why this is so important is because people who are involved with
currency trading use a lot of leverage to enhance their investment returns.
Unless you have a lot of price action, you can’t really place speculative trades that will pay off sooner rather than later.
Most people are familiar with the stock market. After all, this is virtually the only market that ever gets any attention when you watch the news on television. While it’s certainly true that some individual stocks may rise and fall very quickly on any particular trading day, they can be very hard to take those specific stocks that are going to be having a lot of price action.
The currency markets are totally different. People who choose to get involved with Forex market basics understand that there can be some really wild movements in currency pairs a regular basis. There are lots of variables that need to be taken into consideration when placing a Forex trade given the fact that you are typically making trades based on a small handful of currency pairs.
This is not to suggest that the volatility that is oftentimes noticed in the Forex market is due to the fact that it’s in a liquid market. Nothing could be further from the truth. The simple fact of the matter is that the foreign exchange trading marketplace is significantly larger than the equity market place. This is something very few people really understand.
We are talking about trillions of dollars worth of transactions that take place on a regular basis.
A Great Trading Opportunity
You may be wondering whether or not somebody who chooses to trade stock options can benefit from Forex trading. Sticking with the equity markets instead of choosing the double in the foreign exchange market place.
Generally speaking, option contracts with the underlying asset is the value of the stock will not really move as much as you might think because the underlying stock itself generally has to experience some price movement as well. Does that make sense?
This is why people who are looking for a lot of price action should really take a serious look at the Forex market.
At the end of the day, people who are looking for a real opportunity to make a lot of money will be very pleased to discover just how amazing of a market Forex happens to be. Not only is there a lot of liquidity, but there truly is a tremendous opportunity to generate a lot of profit by successfully placing trades that exploit macro economic factors.
Best of all, given the fact that you can get started in the Forex market with a very small amount of money, virtually anybody who has an interest in foreign currency trading can get started today.
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