Forex Market Basics
Forex Market for Beginner
The Foreign Exchange market, also known as Forex or FX, is where financial institutions facilitate the buying and selling of foreign currencies.
It is referred to as the closest market to the ideal perfect competition, notwithstanding the market manipulation by central banks. The Forex market is highly characterized by the volatility and liquidity of currencies moving in strong trends with leverages of up to 500 times. In 2018, the global Forex market turnover was estimated over $6 Trillion per day.
Forex vs. Stocks
A comparative look of the Forex and Stock Markets:
Foreign Exchange Market
- 24 Hour Trading Market.
- No Commissions.
- Easy Access to Market Information.
- Decentralized Exchanges.
- Limited Trading Time of Less Than 7 Hours.
- Commission and Transaction Fees.
- Unbalanced Market Information.
- Centralized Market.
Pay No Commissions*
In the foreign exchange market, costs are confined to the bid-ask spread. PSS charges no commission or additional transaction fees, and its customers’ trade on spreads provided to PSS by some of the world’s largest banks via the FX Trading Station. In the stock market, “no-fee” programs are frequently offered only with provisions mandating minimum account balances or minimum trades per month.
*PSS is compensated through the bid/ask spread except where otherwise noted. Please note commission charges apply for certain classes of non-standard accounts such as Active Trader.
Easily Accessible Foreign Exchange Market Information
Information about stocks is abundant, but so are the stocks. Finding a trade opportunity in the equities markets may mean sifting through data on thousands of stocks, while the foreign exchange trader has only six major currencies to research. Additionally, the vital information that moves equity markets, such as revenues and profits, is proprietary and private, and sometimes subject to fraud, deception and insider trading. In contrast, virtually all of the news that bears on the foreign exchange market is in publicly disseminated reports from governments or research institutions, and released to everybody at the same time.
The knowledge that can be gained from analyzing stocks is easily transferable to the foreign exchange market. Many of the economic indicators familiar to equity traders, such as payroll data and interest rates, affect the currency markets. Likewise, many technical traders have found the foreign exchange market to be particularly attractive, since currencies respond well to many of the common technical indicators, such as MACD, RSI, and Candlestick charting.
Centralized exchanges prove to be advantageous to traders all over the world. However, as with any centralized exchange, there are middlemen to contend with, which add extra cost to investors whether it be in time or in fees.
In contrast, foreign exchange trading is decentralized, which means quotes can vary from different currency dealers.
The competition between foreign exchange dealers is so poignant that traders are offered quicker access and cheaper costs. More so that foreign exchange can now be traded electronically via the internet, even the smallest individual is able to trade in the currency market, and individuals can reap quick and pronounced profits – unrestricted by leverage and other requirements.
Major Currencies Traded
- Known as the United States dollar
- Also known as Greenback or Buck
- Accounts to 86.3% of all global Forex transactions
- The most common investment currency in the International Capital Market
- The most preserved currency held by central banks
- High transactional capability in the Commodity Market
- High intervention power employed by money authorities in market operations to influence exchange rates
- Known as the European Union Euro
- Also known as Fiber
- Accounts to 37.0% of all global Forex transactions
- Used by 17 of the 27 EU member states
- The most preserved currency held by central banks
- The second largest reserve currency as well as the second most traded currency in the world after the United States dollar
- Over 175 million people worldwide use currencies which are pegged to the Euro, including more than 150 million people in Africa
- Known as the Great Britain Pound
- Also known as Cable or Sterling
- Accounts to 15.0% of all global Forex transactions
- Used by 16 of the 27 EU member states
- The fourth most traded currency in the foreign exchange market, after the US dollar, the Euro and the Japanese yenKnown as the European Union Euro
- Known as the Switzerland Franc
- Also known as Swissie
- Accounts to 16.8% of all global Forex transactions
- The only version of the Franc still issued in Europe
- Known as the Japanese Yen
- Accounts to 16.5% of all global Forex transactions
- The third most traded currency in the foreign exchange market, after the US dollar and the Euro
Banks in the foreign exchange market are basically the biggest participants accounting to almost 2/3 of all foreign exchange transactions. These commercial banks earn profits by buying and selling currencies through and from each other, catering both the majority of commercial turnover and large amounts of speculative trading every day.
Commercial and Multi-National Companies
Commercial Companies with global coverage and offices, under the foreign exchange market, require foreign currencies in their course of doing business or making investments elsewhere.
Central Banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates, and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime.
Hedge Funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge fund’s favor.
Investment Management Firms
Investment Management Firms who typically manage large accounts on behalf of customers, such as pension funds and endowments, use the foreign exchange market to facilitate transactions in foreign securities.
Retail Forex Brokers
In the foreign exchange market, brokers act as intermediaries between banks by providing information to where dealers can get the best prices for the currencies.
Sources: www.wikipedia.org / www.corporatefinanceinstitute.com
www.businessdictionary.com / www.readyratios.com / www.moneycrashers.com