Getting Your Hands Dirty with Forex

About Forex

Forex refers to currencies such as the US dollar, Japanese
Yen, Pound, and Euro. The forex market is a market or exchange
where currencies are traded like other securities such as
stocks and commodities. This just happens to be the world’s
largest financial market, with a trading value of over $4
trillion a day. Forex, FX, or Foreign exchange are terms
commonly used to refer to the market.

The Forex market is considered an Over-the-Counter (OTC)
or ‘Interbank’ market because this market is run electronically
through a network of banks, continuously over a 24-hour
period. The forex market is highly volatile, offering good
trading opportunities which increase the prospects of earning
good profits, while also indicate the potential for large
losses.

There are number of major financial centers in which the
Forex market is particularly active, including New York,
London, Tokyo, Singapore and Hong Kong.

What is traded in FX Market?

In the Forex market, currencies of various countries are
bought and sold. But remember, you don’t actually buy or
sell actual currencies, you actually trade in currency pairs
where you ‘plus’ (long, increase holding) one currency and
‘minus’ (short, decrease holding) the other. For instance,
the US dollar with the Swiss Franc (USD/CHF) or the British
pound with the Japanese Yen (GBP/JPY).

Who trades in the FX Market?

The main participants in the forex market are Central and
Commercial banks, hedge funds, institutional investors and
individual investors. Banks are considered for the most
part, the market makers in the FX market. Banks gives two
way quotes to traders, meaning they provide both a ‘bid’
and ‘ask’ price.

Speculators, Hedgers and Arbitrageurs enter the market
for typically different reasons. For instance, hedgers take
forex contracts to safeguard their existing corporate finance
position, while on the other hand, arbitrageurs participate
in the market to take the advantage of price differences.
Over 95% of the forex market activity is estimated to be
for speculative purpose; this helps in providing substantial
liquidity.

Why trade Forex?

1. 24 hour Market – Forex markets are virtually
non-stop, meaning that forex trading continues 5 days a
week, 24 hours a day, as some exchange around the world
is always open. This is good particularly for those who
are not regular traders but want to trade whenever they
are free.

2. Leverage – Leverage is the main advantage
in the forex market; brokers provide so much leverage, sometimes
even 50X or 100X, which aids traders in taking large positions
without actually betting in cash. Remember, that leverage
is a double-edged sword!

3. High Liquidity – The forex market is highly
liquid and helps in providing comfort to exit a trade at
any time without having to worry about having adequate buyers
and sellers in the market.

4. Less Transaction cost – Transaction cost
is very low in the FX market, compared to other markets
such as equities and commodities. There is no third party
or middleman involved in the forex market, which helps in
saving on cost of trading.

5. Not easy to operate – The Forex Exchange
market is so large and complex, it cannot easily be manipulated
by a single entity due to the large volumes and high amount
of liquidity. It is not easy to inflate market prices as
in equities or commodities.