Forex Market

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Although the term forex market makes the human mind think of a tangible market in reality the forex market as it has developed today can be thought of as a virtual market due to its over the counter characteristics which are some of the reasons behind its booming popularity and its overall expansion worldwide. The forex market is an international market, a market that knows no geographical boundaries and no local working hours as with the use of the internet and the trading platform as a trader you are extended the opportunity to trade 24/5 as the nature of the forex market does not allow it to sleep.

The forex market as mentioned in other pages of our index has one main difference to any other financial related market and that is its size which is a result of its nature. The daily turnover of the forex market expands beyond the 4 trillion Dollar mark on a day to basis as financial centers from across the globe act as trading points between a wide range of currency and commodity buyers and sellers which wish to exchange goods for bid and ask prices. The main reason of existence of the forex market is to accommodate international trades although with the current nature of forex today the majority of trades executed from forex brokers around the world are performed for speculative reasons.

The Forex Market Main Features

  • Geographical Dispersion
  • Continuous Operations: 24/5
  • Variety of Factors Affecting Exchange Rates
  • Low margins of Relative Profit
  • The presence of leverage to enhance profit margins

Forex Market Trading

Trading in the forex market has for the past decade deviated to the internet where the actual practice has become so popular due to the ease of trading through online trading terminals or online trading platforms as they are also well known. The real difference has occurred during the past 5 years as the worldwide web and the possibilities of the internet have expanded rapidly allowing the interbank foreign exchange to take new dimensions and year after year grow in total volume of trades executed reaching and exceeding the $3 billion mark of day to day trades.

Execution of orders are now been enhanced with state of the art trading technology which is connected to a main server and allows multiple users to trade currencies, commodities and futures from any location worldwide provided they have a functioning funded account and that have access to the internet.
All you need to do is download the forex terminal to your computer and issue an account. From that point on you can select to trade in the forex market with a non expiring forex trading demo account or with a real money trading account which will enjoy a forex bonus during first deposit, lucrative benefits and added benefits, flexible leverage reaching up to 1:500 with no minimum deposit requirements, no commissions, no hidden costs, no re-quotes and with the benefits of options for automated trading and personal coaching.

Only Macro Events Affect the Forex Market

The most actively traded currencies are only affected by macro events, such as changes in government or central bank policies, in contrast with stocks where individual company events can have a massive effect on price movements. This is cited as an advantage by FOREX traders who believe that this translates as less uncertainty in their trading as opposed to trading on the stock market where surprise announcements, such as a CEO quitting as in the case with Tesco in the UK, can have a sizeable effect on the price of the instrument. The high liquidity of the market also means that it is much more difficult for someone to enter the market and influence the price to their advantage.

No Upward Bias

It is common knowledge that the stock market in the US has always increased in value in the long term. However in the forex market currencies are traded in pairs, when the value of one currency is falling this automatically means that the value of another currency is rising. This is seen as an advantage as there is equal opportunity for profit from both long and short trades.

Forex Market Participants

In difference to a stock market the forex market is realistically divided in to various levels of access which trade in the forex market for different reasons. Participants include banks, commercial companies, central banks, hedge funds, investment firms, money transfer companies and lead to retail foreign exchange brokers. Each of these groups trades forex at different volumes and therefore enjoys different spreads and can enjoy economies of scale much easier than a private trader or a retail trader.
At the top basis banks deal with the forex market with bid and ask prices which are not available to anybody outside their immediate circle, these transactions account for the majority of bank oriented transactions accounting to 53% of all transactions in total which are transactions dealt for reasons of keeping currencies on hand for future sale at times when trading prices are lucrative or simply for reasons of keeping currencies on hand in order to be able to cater the day to day activities and pay employees that are employed at branches outside the headquarter mainland.

Following on in the category of participants of the forex market are of commercial companies which trade currencies for reasons of both profit and efficient currency inventory management in order to be able to execute purchases from overseas without having to sustain losses when foreign currencies are not in their favor. The amounts of trades are relatively small compared to other categories of forex market trades.

It is only reasonable to understand that in the same way private banks and banks trade forex, central banks play a key role in the forex market as they attempt to handle their money supply and their payments for various reasons ranging from making good management of the currency volumes on hand, based on what transactions are due every month, every semester or every trimester to third party governments or third party funds which have granted them assistance or loans for any reason.
Even more for stabilization reasons of their primary currency in an attempt to control devaluation, inflation and the overall value of the currency. The above noted should not be taken for granted that banks or central banks always execute successful trades as similar to any retail trader they can reach the wrong speculations and sustain major losses.

As explained previously the majority of trades executed in the forex market are speculative meaning that at the time of the transaction there was no basic need for the trade of currencies but the currency was traded for clearly speculative reasons which might be based on the traders speculation that a currency price will rise in the future or that the currency being exchanged will soon sustain a drop or even more because their will be a need for the currency in the future for private or commercial reasons.
The category of speculators as you can understand includes hedge funds too as the way hedge funds operate are very similar to the reasons a private trader executes transactions with the difference that they are faciiliated by one individual or one firm that controls various portfolios and uses themt o trade as one entity. Due to the large volume of trades hedge funds have a major power of the worldwide forex market as they have the luxury of trading in volume, trading with major leverage and even more trading borrowing large volumes of money due to their portfolio which appears as one wallet.

Hedge funds have the power to influence the market in a very serious way as they have many factors in their favor primarily because of their large volume of trading and large volume of portfolio. These funds can be controlled by individual licensed brokers who have the ability and the experience to both gather customers and add up funds to what we call a hedge fund or from investment management firms that handle customer portfolios or pension funds and use them to enter the forex market as an offering to various services they might offer which offer customers a combines return on investment.

Following up in the list of the vital participants of the forex market are money transfer companies which enable customers to send funds overseas under a certain fee. These companies usually maintain branches across the globe where customer can walk in submit their identification and send money to friends, associates or relatives under a transfer fee which is usually bigger than the normal fee banks charge due to the instant execution.

These money transfer agencies are required to maintain the major currencies they accommodate money transfers in order to secure their business and keep inventory of most frequently used currencies when value of currencies are less expensive and will therefore help them maintain profits higher and transfer fees lower. A correct currency variety management will help the business manage its resources and make the most of its business which is why this category of business entities are active participants in the forex market through their management or their outsourced accountants. The last category of participants is the category in which both you as a trader, trading forex from your account belong. This category is commonly referred to as retail trading and it adds up from a number of forex brokers and banks which enhance customers to trade in the forex market with the use of a trading platform.

Retail brokers are in their majority licensed from a security exchange commission of the particular jurisdiction in which they maintain headquarters and are subject to net capitalization rules which require bank guarantee that the firm has enough capital to operate and therefore is both committed to serving its customers that wish to participate in the forex market. The rule has arise after several non licensed entities were offering traders opportunities to trade in the forex market with lucrative spreads and lucrative leverage with no guarantees and with no consequences towards their unfair practices. As a result of the rule and the stricter policies many of the small and perhaps questionable brokers have now disappeared leaving the forex market access to companies which can guarantee their services.

Major players in the Forex market

The Forex market is divided into different levels of access. This differs to the stock market where everyone has the access to the same prices. The different levels of the Forex market include the inter-bank market, Forex brokers, Foreign Exchange Brokers, smaller investment banks, large multi-national corporations, central banks large hedge funds and retail Forex-metal makers. Below is a description of what makes the major market players in the Forex industry so distinctive.

The Inter-bank market is considered to hold the top players in the Forex industry. It consists of the largest investment banking firms. Spreads (difference between the bid/ask price) in the inter-bank market are usually unavailable and they are unknown to players outside the inter-bank market circle. By descending the levels of access, due to volume, the difference between the bid and ask prices widens from 0-1 pip to 1-2 pips for currencies such as the euro. A better spread can be demanded here. If a trader is able to guarantee large numbers of transactions for large amounts then they can command a lesser difference between the bid and ask price. Keep in mind that the levels of access that make up the Forex market are verified by the size of trades. Inter-bank market reports show that the players in this market mount to 53% of all transactions in the Forex industry. Despite the far lower quantity of traders in the market, the volume and trade size from the players make the inter-bank market one of the largest trading arenas.

As mentioned above, the next most important markets are the smaller investment banks, the large multi-national corporations, the big hedge funds and some retail Forex-metal market makers. Central Banks have a big say in the valuation and trend of currencies. The slightest intervention could substantially alter the direction of a currency. Foreign Exchange Brokers offer currency exchange and international payments to private personage and firms that are usually delivered physically to a bank account. These are different to Forex Brokers because they do not put forward any trading activities. These companies are rather popular in the UK as a reported 14% of currency transfers and payments are made with Foreign Exchange Brokers. Their distinction in the UK financial market is due to the fact that they offer enhanced exchange rates and sometimes cheaper payments than a usual bank.

As in any business or financial market, the Forex market carries some risks. However these risk factors should not put you off trading in the Forex market, you should use them to guide and aid you in becoming aware of them and being able to avoid them if possible.

Technical Issues

Any trader who encounters a technical issue with their computer or platform is always at risk of losing out on a trade or being prevented from closing a trade at a vital moment. A system failure can lead to a substantial loss for Forex traders who use internet based or any other electronic system to execute trades. There is always the possibility of some part of the system crashing.

The trader who is experiencing a system failure will be prohibited in entering new orders or executing existing ones. A system failure can be long term or short term. However long the duration is, the system failure is always a nightmare. The trader is also restricted from modifying or cancelling previously entered orders. The most devastating possible consequence for a system failure is losing the chance to open and close an order when you really need to. It is vital that you make sure your trading platform and operating system runs can provide you with a reliable basis for Forex trading.

Leverage

Leverage is referred to as a ‘double- edged sword’. There is the risk of gaining huge profits or there is the awful risk of losing funds. Fortunately, leverage in the Forex market allows a trader to hold a large position with a small amount of capital. Then again, such a benefit entails a disadvantage – that’s where the term the ‘double edged sword’ comes into play. The price in the market can move in an unfavourable direction, this can disappointingly cause the high leverage to end up producing large losses in relation to the initial deposit. Sometimes a minor move in the market can even bother the position and the end result will be a large loss of capital, or possibly a loss of the entire account. Therefore leverage does entail risk and it is advised to be wary of the negative influence a high leverage can have.

Market Movement

Within the time that a trader places a trade and closes it, there will be fluctuations in the foreign exchange rate. This can easily affect the profit and the losses relating to the Forex trade as well as the price of it. There is also the unfortunate risk of possibly losing the entire investment.

Trade Protection

It is common to notice many advertisements that state ‘your investment is segregated’ for instance. Captions similar to these are broker companies to be cautious of as sometimes they are advertising false truths.

Always take a careful look at the trader agreement you agree to when opening a trading account, you could be agreeing to paying additional losses.

The funds that a trader deposits to trade Forex are uninsured and they sometimes do not receive a priority in bankruptcy. It goes the same for the dealers. If the dealer goes bankrupt, the customer funds that were deposited in a FDIC-insured bank account are not protected.

Fraud

Fraud is a main concern in today’s modern day and age within the financial markets. Every trader must be protected from fraud as foreign exchange scams have raised exceedingly over the past few years. Enough research and studying about the different risk management programs should be undertaken by every investor before entering any currency trading market. Make sure your broker has the necessary measures in place.

Avoiding scams

After reading all the information provided above, you will become attentive toward many of the risks that Forex trading entails. It must be a trader’s first most concern when entering the market that he/she is fully aware of each risk, how to spot it, and how to prevent it.

Over-promising firms are usually going to disappoint. Here are some promises that companies state which may need investigating further into to discover if that Forex broker can actually deliver what they say they can:

  • Advertisements that state a get—rich quick company are commonly liars.
  • Companies that promise large profits and state that they can predict large profits.
  • A company that says they will double/triple a trader’s money in less than a month.
  • Firms that advertise that they guarantee a monthly return.
  • Every Forex broker must entail financial risk management. Some companies do not and this is a company to avoid.

Here are some tips about how to avoid Forex scams:

  • Avoid broker companies that advertise slogans such as ‘Whichever way the market moves, you can’t lose’.
  • Avoid companies that tell you Forex is not a risky market.
  • Before deciding to choose a broker, take thorough research and investigate the background of the company.

The Forex market offers a host of advantages over the other investment markets such as the stock or the futures market.

Because of these benefits, a lot of traders tend to choose the Forex market nowadays over their former investment markets and new traders are more tempted to dive into Forex trading than any other market.

The table below will cover the main differences between the Forex market, the stock market and the futures market. As a beginner trader you may notice the reason why investors prefer the Forex market over others.

Forex market versus the Stock market

Forex market Stock Market
Liquidity >$3 trillion daily volume 200 billion daily volume
Trading Hours 24/5 M-F: 8.30 EST- 5.00 EST
Market conditions Profit in both rising & falling market Profit only from rising market
Commission Free, tight spreads High commission & transaction fees
Leverage Up to 500:1 2:1- 4:1
Analyzing 85% of volume on major currencies- USD, EUR, GDP, etc Over 40,000 stocks to analyze

The contrast between the Forex market and other markets is very clear; there is an extended explanation below to inform you in more detail, the benefits of the Forex market.

Forex Market Benefits explained

The Forex market is accessible to all traders 24 hours a day and 5.5 days a week. This advantage enables traders to invest at any time they please without the concern that the market is about to close any time soon. The market opens when New Zealand begins operations on Sunday at 3.00pm EST. It then closes when San Francisco ends operations on Friday at 5.00pm EST. The Forex market is an endless cycle enabling traders to execute transactions in any time zone. The Forex market has offers a trading arena that has extremely high liquidity. It is the most liquid financial market in the world and because of this up to $3 trillion is traded on a daily basis. The extreme liquidity of the Forex market differs to other markets as it allows traders to open and close positions as they wish with ease. The Forex market is ensured with price stability and it prevents market manipulation from top market makers.

All this information regarding the benefits of Forex does not necessarily indicate an easy form of trading and gaining money. An investor wishing to enter the Forex market requires more than just a simple understanding about these matters. A trader must thoroughly educate him/herself about the background, history, implements, technicality and process of Forex. A trader interested in Forex must ensure that he/she holds enough patience, determination, commitment, discipline and time for his/her trades. There are many factors to learn about trading with Forex before opening a live account and it is vital that a trader learns the factors inside out.