What Is Forex ?
The foreign exchange market is the “place” where currencies are traded. Currencies are important to most people around the world, because currencies need to be exchanged in order to conduct foreign trade and business.
For example, imagine a situation where the U.S. dollar is expected to strengthen in value relative to the euro. A forex trader in this situation will buy dollars and sell euros. If the dollar strengthens, the purchasing power to buy euros has now increased. The trader can now buy back more euros than they had to begin with, making a profit.
This is similar to stock trading. A stock trader will sell a stock if they think its price will fall in the future and buy a stock if they think its price will rise in the future and . Similarly, a forex trader will buy a currency pair if they expect its exchange rate will rise in the future and sell a currency pair if they expect its exchange rate will fall in the future.
Why Trade Forex ?
Forex never sleeps
Trading goes on all around the world during different countries’ business hours. You can, therefore, trade major currencies at any time, 24 hours a day. It means that there is also something happening at almost any time of the day or night. You dictate when to trade and how to trade.
Go long or short
Unlike many other financial markets, where it can be difficult to sell short, there are no limitations on shorting currencies. If you think a currency will rise, buy it. If you think it will fall, sell it.
Liquidity
Because forex is a $4 trillion a day market, with most trading concentrated in only a few currencies, there are always a lot of people trading. This makes it very easy to get into and out of trades at any time, even in large sizes.
Low trading costs
Many firms don’t charge commissions – you pay only the bid/ask spreads. There are no expensive exchange fees or data licenses. The cost of trading is the spread between the buy price and the sell price, which is always displayed on your trading screen.
International exposure
As the world becomes more and more global, investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country, forex is an easy way to gain exposure while avoiding foreign securities laws and financial statements in other languages.
Available leverage
You don’t need a lot of money to get started. Because of the unmatched liquidity available in the forex market, you can trade forex with considerable leverage (typically 200:1). This can allow you to take high advantage of even the smallest moves in the market. Leverage can significantly increase your losses as well as your gains.
Forex Average Daily Turnover
Global Reserve Currencies
| Rank | Name | Market share |
|---|---|---|
| 1 |  Citi |
16.04% |
| 2 |  Deutsche Bank |
15.67% |
| 3 |  Barclays Investment Bank |
10.91% |
| 4 |  UBS AG |
10.88% |
| 5 | HSBC |
7.12% |
| 6 | JPMorgan |
5.55% |
| 7 | Bank of America Merrill Lynch |
4.38% |
| 8 | Royal Bank of Scotland |
3.25% |
| 9 |  BNP Paribas |
3.10% |
| 10 | Goldman Sachs |
2.53% |
What is an Exchange Rate ?
The foreign exchange market is a global decentralized marketplace that determines the relative values of different currencies. There is no centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will be identical to one another in value, and it’s also rare that any two currencies will maintain the same relative value for more than a short period of time. In forex, the exchange rate between two currencies constantly changes.
For example, on January 2, 2011, one euro was worth about $1.33. By May 2, 2011, one euro was worth about $1.48. The euro increased in value by about 10% relative to the U.S. dollar during this time.
Why Do Exchange Rates Change ?
Currencies trade on an open market, like stocks, bonds, computers, and many other goods and services. A currency’s value fluctuates as its supply and demand fluctuates, just like anything else.
- An increase in supply or a decrease in demand for a currency can cause the value of that currency to fall.
- A decrease in the supply or an increase in demand for a currency can cause the value of that currency to rise.
Spot Market and the Forwards and Futures Markets
There are actually three ways that corporations and individuals trade forex: the spot market, the forwards market and the futures market. The forex trading in the spot market always has been the largest market because it is the “underlying” real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the beginning of electronic trading, the spot market has witnessed a huge growth in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.
Why Currency trading is not for everyone
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment. It is advisable to seek advice from an independent financial advisor.
