Understanding The Forex Market

The Forex market is where trading currency takes place. A where Financial Intermediaries and other official institutions facilitate the buying and selling of forex currencies. Forex transactions involves one participant purchasing a set of one currency in exchange for paying a set of another currency. The Forex exchanges that we see today started evolving during the late 60’s where most conuntries and institute opted for a floating rate exchange system governed by demand and supply.

The market is now one of the most liquid financial exchange in the world, and includes trading between central banks, currency speculators, large banks, corporations, governments, and other institutions. The daily volume in the global forex market are growing the fastest out of all the asset classes where daily turnover is on average US3.2 Trillion as reported by the Bank Of international settlements. The main reason for the forex market is to provide a market where trade can take place between impoting and exporting countries.

Major Participants :

Banks

The bank market also called the interbank markets makes the majority of commercial revenue/turnover and speculative activity every day. A large bank usually trade billions of Euros/Sterling and Dollars on a frequent daily basis. Some of the activity is based on the private clients account however the majourity of turnover amounts to the banks private investment activity.

Commercial Entities

These are companies who import from abroad and export to foreign countries who need to pay for the goods or service by exchanging their base currency denomination. Commercial entities make up a small portion of the currency market compared to banks and speculators.

Central banks

Central banks hold substancial reserves of other countries currencies as well as their own, every central bank has a monetary policy that they use to control inflation, interest rates and other economic indicators and use their reserves to achieve their goals, ultimately the transactions that the central banks take part in can move the market, even a mere rumour about a upcoming change in monetary policy can be enough to move the Forex Markets.

Speculators % Hedge Funds

Upto 80% of the Forex market is made up of speculators and hedge fund managers that use Forex market to make money by soeculating on the direction of the move. They have no intention of taking delivery of the currency once the deal is done but instead wait for the favourable movement and offset the currency for gains. These speculators can often be a nuisance to central banks, George Soros’s activity on the GBP ultimately cost Britian their place in the Exchange Rate Mechanism in the early nineties and can play a havoc to monetary policy.

To become a successful forex trader you must know exactly how each of the major players in the market affect the currency pairs, you must be aware of when important news will be released and must keep on top of potentially large transactions that may be completed by the big players in the future. It is essential to follow the most significant contributers of the forex markets.

Forex Markets can be traded 24 hours a day. The main players in the forex markets are speculators, central banks, banks and commercial entities Over US$3 Trillion are traded daily on the Forex Market. Forex is the most liquid market in the world, you will always find a buyer and a seller quickley.

Why Trade Forex?

For an investor mostly familiar with stocks or mutual funds, trading alternative instruments such as currencies may seem too exotic or too risky. Before dismissing curency trading, give some thought to the following points:

• Due to the fact that there is no tradition of high commission charges and no centralized exchange to maintain, the costs of operating in the currency markets is far less than in any other market. This works to the advantage of the smaller player.
• Unlike other markets where big players can manipulate markets by virtue of their capitalization, the forex markets are too big for such tactics to work. Even world governments, with their huge reserves, have had a great deal of difficulty just slowing the natural trends in the forex markets.
• The wide variety of leverage choices available in the forex marketplace allows traders at any level of risk tolerance to tailor their approach to suit their own unique financial conditions and objectives.
• The value of a currency is derived from a large number of factors, including interest rates, political change, national economic policy, etc. As a result, forex rates tend to move in clearer trends than other instruments, with less “slop and chop.”

As you can probably see, there are a lot of good reasons to consider the interbank forex markets as a way of expanding and enhancing an investing strategy.

Application to Trading

Because the forex markets are active 24 hours a day, a lot of traders believe that they need to manage their accounts around the clock. This may be suitable for some traders but it’s not a requirement. Currency rates move in trends that can last for years at a time. If you’re using a system that can exploit these moves, such as the iSigma approach, once a day portfolio management is more than adequate. When a few hours’ movement results in a huge price shift, a stop order in the market will take care of damage control if the move is against your position. Also, many forex brokers will have guarantees on how your stop or limit orders are filled, protecting you from slippage in volatile situations.

All forex brokers offer leveraged accounts, making it possible to enhance the performance of a trading approach. This can be a double edged sword, as a highly margined losing trade can be very damaging, possibly resulting in a margin call from the broker. The key here is to use margin in a way that reflects a realistic evaluation of one’s tolerance for risk, in conjunction with a solid trading plan built to control risk.

Is Forex For You ?

While there is no one market perfect for all traders, we hope that you’ll give the forex market due consideration as a venue to enhance your trading plan. Forex trading offers minimal operating expenses, generous leverage choices and plenty of opportunities for profit.