Foreign forex market definition

Foreign Exchange Market.

What is the 'Foreign Exchange Market'

The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered the largest financial market in the world.

BREAKING DOWN 'Foreign Exchange Market'

The foreign exchange market – also called forex, FX, or currency market – trades currencies. Aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the forex market also enables currency conversion for international trade and investments.

The forex market has unique characteristics and properties that make it an attractive market for investors who want to optimize their profits.

Highly Liquid.

The forex market has enticed retail currency traders from all over the world because of its benefits. One of the benefits of trading currencies is its massive trading volume, which covers the largest asset class globally. This means that currency traders are provided with high liquidity.

Open 24 Hours a Day, 5 Days a Week.

In the forex market, as one major forex market closes, one in another part of the world opens. Unlike stocks, the forex market operates 24 hours daily except on weekends. Traders find this as one of the most compelling reasons to choose forex, since it provides convenient opportunities for those who are in school or work during regular work days and hours.

The leverage given in the forex market is one of the highest forms of leverage that traders and investors can use. Simply put, leverage is a loan given to an investor by his broker. With this loan, investors are able to enhance profits and gains by increasing traders’ and investors’ control over the currencies they are trading.

For example, investors who have a $1,000 forex market account can trade $100,000 worth of currency with a margin of 1%, with a 100:1 leverage.

The Biggest in the World of Finance.

In 2013, the Triennial Central Bank Survey of Foreign exchange and OTC Derivatives Market Activity provided statistics on the amount of currencies traded daily, and has stated an average of $4 trillion traded daily. The break-down of this amount shows that $1.490 trillion were traded in spot transactions, $475 billion in outright forwards, $1.765 trillion in foreign exchange swaps, $43 billion in currency swaps, and $207 billion in options and other forex products.

Forex Market.

What is the 'Forex Market'

The forex market is the market in which participants can buy, sell, exchange, and speculate on currencies. The forex market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market with over $5 trillion in daily transactions, which is more than the futures and equity markets combined.

BREAKING DOWN 'Forex Market'

The foreign exchange market is not dominated by a single market exchange, but a global network of computers and brokers from around the world. Forex brokers act as market makers as well, and may post bid and ask prices for a currency pair that differs from the most competitive bid in the market.

The forex market is made up of two levels; the interbank market and the over-the-counter (OTC) market. The interbank market is where large banks trade currencies for purposes such as hedging, balance sheet adjustments, and on behalf of clients. The OTC market is where individuals trade through online platforms and brokers.

Operating hours.

From Monday morning in Asia, to Friday afternoon in New York, the forex market is a 24-hour market, meaning it does not close overnight. This differs from markets such as equities, bonds, and commodities, which all close for a period of time, generally in the New York late afternoon. However, as with most things there are exceptions. Some emerging market currencies closing for a period of time during the trading day.

The Big Players.

The US dollar is by far the most traded currency, making up close to 85 percent of all trades. Second is the euro, which is part of 39 percent of all currency trades, and third is the Japanese yen at 19 percent. (Note: these figures do not total 100 percent because there are two sides to every FX transaction).

According to the 2015 Euromoney survey, Citigroup and Deutsche Bank were the two biggest banks in the forex market, combining for more that 30 percent of the global market share.

Foreign Exchange Market.

The Market That Dwarfs the Stock Market.

Definition: The foreign exchange market is a global online network where traders buy and sell currencies. It has no physical location and operates 24 hours a day, seven days a week. It sets the exchange rates for currencies with floating rates.

This global market has two tiers. The first is the Interbank Market. It's where the biggest banks exchange currencies with each other. Even though it only has a few members, the trades are enormous.

As a result, it dictates currency values.

The second tier is the over-the-counter market. That's where and individuals trade. The OTC has become very popular since there are now many companies that offer online trading platforms. For more, see About Forex Trading.

Foreign exchange trading is a contract between two parties. There are three types of trades. The spot market is for the currency price at the time of the trade. The forward market is an agreement to exchange currencies at an agreed-upon price on a future date. A swap trade involves both. Dealers buy a currency on the spot market (at today's price) and sell the same amount in the forward market. This way, they have just limited their risk in the future. No matter how much the currency falls, they will not lose more than the forward price. Meanwhile, they can invest the currency they bought on the spot market.

The interbank market is a network of banks that trade currencies with each other.

Each has a currency trading desk called a dealing desk. They are in contact with each other continuously. That process makes sure exchange rates are uniform around the world.

The minimum trade is one million of the currency being traded. Most trades are much larger, between 10 million to 100 million in value.

As a result, exchange rates are dictated by the interbank market.

The interbank market includes the three trades mentioned above. Banks also engage in the SWIFT market. It allows them to transfer foreign exchange to each other. SWIFT stands for Society for World-Wide Interbank Financial Telecommunications.

Banks trade to create profit for themselves and their clients. When they trade for themselves, it's called proprietary trading. Their customers include governments, sovereign wealth funds, large corporations, hedge funds and wealthy individuals. (Source: "How Trading Works - Interbank and the Forex," FX Street. "What Is the Interbank Market?," Investing for Dummies.)

Here are fifteen biggest players in the foreign exchange market.

In 2014, Citigroup, Barclays, JPMorgan Chase and The Royal Bank of Scotland pled guilty to illegal manipulation of currency prices.

Here's how they did it.

Traders at the banks would collaborate in online chat rooms. One trader would agree to build a huge position in a currency, then unload it at 4 p. m. London Time each day. That's when the WM/Reuters fix price is set. That price is based on all the trades taking place in one minute. By selling a currency during that minute, the trader could lower the fix price. That's the price used to calculate benchmarks in mutual funds. Traders at the other banks would also profit because they knew what the fix price would be.

These traders also lied to their clients about currency prices. One Barclays trader explained it as the “worst price I can put on this where the customer’s decision to trade with me or give me future business doesn’t change.” (Source: “The Forex Fix,” The Financial Times, November 12, 2014.

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The Chicago Mercantile Exchange was the first to offer currency trading. It launched the International Monetary Market in 1971. Other trading platforms include OANDA, Forex Capital Markets, LLC and Forex.

The retail market has more traders than the Interbank Market. But the total dollar amount traded is less. The retail market doesn't influence exchange rates as much. (Source: "The Foreign Exchange Market," Martin Boileau, University of Colorado.)

Central banks don't regularly trade currencies in foreign exchange markets. But they have a significant influence. Central banks hold billions in foreign exchange reserves. Japan holds $1.2 trillion, mostly in U. S. dollars. Japanese companies receive dollars in payment for exports. They exchange them for yen to pay their workers.

Japan, like other central banks, could trade yen for dollars in the forex market when it wants the value to fall. That makes Japanese exports cheaper. Japan prefers to use more indirect methods though, such as raising or lowering interest rate to affect the yen's value. (Source: "The Main Players in the Forex Market," FXStreet.)

For example, the Federal Reserve announced it would raise interest rates in 2014. That sent the dollar's value up 15 percent. For more, see Asset Bubbles.

For the past 300 years, there has been some form of a foreign exchange market. For most of U. S. history, the only currency traders were multinational corporations that did business in many countries.

They used forex markets to hedge their exposure to overseas currencies. That's because the U. S. dollar was fixed to the price of gold. For more, see Gold Price History.

The foreign exchange market didn't take off until 1973. That's when President Nixon completely untied the value of the dollar to the price of an ounce of gold. The so-called gold standard kept the dollar at a stable value of 1/35 of an ounce of gold. For more, see History of the Gold Standard.

Part 1: What Is Forex Trading ? – A Definition & Introduction.

An Introduction to FOREX Trading:

This free Forex mini-course is designed to teach you the basics of the Forex market and Forex trading in a non-boring way. I know you can find this information elsewhere on the web, but let’s face it; most of it is scattered and pretty dry to read. I will try to make this tutorial as fun as possible so that you can learn about Forex trading and have a good time doing it.

Upon completion of this course you will have a solid understanding of the Forex market and Forex trading, and you will then be ready to progress to learning real-world Forex trading strategies.

Basically, the Forex market is where banks, businesses, governments, investors and traders come to exchange and speculate on currencies. The Forex market is also referred to as the ‘Fx market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it is the largest and most liquid market in the world with an average daily turnover of $3.98 trillion.

The Fx market is open 24 hours a day, 5 days a week with the most important world trading centers being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.

It should be noted that there is no central marketplace for the Forex market; trading is instead said to be conducted ‘over the counter’; it’s not like stocks where there is a central marketplace with all orders processed like the NYSE. Forex is a product quoted by all the major banks, and not all banks will have the exact same price. Now, the broker platforms take all theses feeds from the different banks and the quotes we see from our broker are an approximate average of them. It’s the broker who is effectively transacting the trade and taking the other side of it…they ‘make the market’ for you. When you buy a currency pair…your broker is selling it to you, not ‘another trader’.

• A brief history of the Forex market.

Ok, I admit, this part is going to be a little bit boring, but it’s important to have some basic background knowledge of the history of the Forex market so that you know a little bit about why it exists and how it got here. So here is the history of the Forex market in a nutshell:

In 1876, something called the gold exchange standard was implemented. Basically it said that all paper currency had to be backed by solid gold; the idea here was to stabilize world currencies by pegging them to the price of gold. It was a good idea in theory, but in reality it created boom-bust patterns which ultimately led to the demise of the gold standard.

The gold standard was dropped around the beginning of World War 2 as major European countries did not have enough gold to support all the currency they were printing to pay for large military projects. Although the gold standard was ultimately dropped, the precious metal never lost its spot as the ultimate form of monetary value.

The world then decided to have fixed exchange rates that resulted in the U. S. dollar being the primary reserve currency and that it would be the only currency backed by gold, this is known as the ‘Bretton Woods System’ and it happened in 1944 (I know you super excited to know that). In 1971 the U. S. declared that it would no longer exchange gold for U. S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods System.

It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange market, although it did not become widely electronically traded until about the mid 1990s.

(OK! Now let’s move on to some more entertaining topics!)…

Forex trading as it relates to retail traders (like you and I) is the speculation on the price of one currency against another. For example, if you think the euro is going to rise against the U. S. dollar, you can buy the EURUSD currency pair low and then (hopefully) sell it at a higher price to make a profit. Of course, if you buy the euro against the dollar (EURUSD), and the U. S. dollar strengthens, you will then be in a losing position. So, it’s important to be aware of the risk involved in trading Forex, and not only the reward.

• Why is the Forex market so popular?

Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not easy to get there, but if you are determined and disciplined, you can make it happen. Here’s a quick list of skills you will need to reach your goals in the Forex market:

Ability – to take a loss without becoming emotional.

Confidence – to believe in yourself and your trading strategy, and to have no fear.

Dedication – to becoming the best Forex trader you can be.

Discipline – to remain calm and unemotional in a realm of constant temptation (the market)

Flexibility – to trade changing market conditions successfully.

Focus – to stay concentrated on your trading plan and to not stray off course.

Logic – to look at the market from an objective and straight forward perspective.

Organization – to forge and reinforce positive trading habits.

Patience – to wait for only the highest-probability trading strategies according to your plan.

Realism – to not think you are going to get rich quick and understand the reality of the market and trading.

Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the market at all times.

Self-control – to not over-trade and over-leverage your trading account.

As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and mastering and effective Forex trading strategy, building an effective trading plan around that strategy, and following it with ice-cold discipline. Money management is key here; leverage is a double-edged sword and can make you a lot of money fast or lose you a lot of money fast. The key to money management in Forex trading is to always know the exact dollar amount you have at risk before entering a trade and be TOTALLY OK with losing that amount of money, because any one trade could be a loser. More on money management later in the course.

Banks – The interbank market allows for both the majority of commercial Forex transactions and large amounts of speculative trading each day. Some large banks will trade billions of dollars, daily. Sometimes this trading is done on behalf of customers, however much is done by proprietary traders who are trading for the bank’s own account.

Companies – Companies need to use the foreign exchange market to pay for goods and services from foreign countries and also to sell goods or services in foreign countries. An important part of the daily Forex market activity comes from companies looking to exchange currency in order to transact in other countries.

Governments / Central banks – A country’s central bank can play an important role in the foreign exchange markets. They can cause an increase or decrease in the value of their nation’s currency by trying to control money supply, inflation, and (or) interest rates. They can use their substantial foreign exchange reserves to try and stabilize the market.

Hedge funds – Somewhere around 70 to 90% of all foreign exchange transactions are speculative in nature. This means, the person or institutions that bought or sold the currency has no plan of actually taking delivery of the currency; instead, the transaction was executed with sole intention of speculating on the price movement of that particular currency. Retail speculators (you and I) are small cheese compared to the big hedge funds that control and speculate with billions of dollars of equity each day in the currency markets.

Individuals – If you have ever traveled to a different country and exchanged your money into a different currency at the airport or bank, you have already participated in the foreign currency exchange market.

Investors – Investment firms who manage large portfolios for their clients use the Fx market to facilitate transactions in foreign securities. For example, an investment manager controlling an international equity portfolio needs to use the Forex market to purchase and sell several currency pairs in order to pay for foreign securities they want to purchase.

Retail Forex traders – Finally, we come to retail Forex traders (you and I). The retail Forex trading industry is growing everyday with the advent of Forex trading platforms and their ease of accessibility on the internet. Retail Forex traders access the market indirectly either through a broker or a bank. There are two main types of retail Forex brokers that provide us with the ability to speculate on the currency market: brokers and dealers. Brokers work as an agent for the trader by trying to find the best price in the market and executing on behalf of the customer. For this, they charge a commission on top of the price obtained in the market. Dealers are also called market makers because they ‘make the market’ for the trader and act as the counter-party to their transactions, they quote a price they are willing to deal at and are compensated through the spread, which is the difference between the buy and sell price (more on this later).

Advantages of Trading the Forex Market:

• Forex is the largest market in the world, with daily volumes exceeding $3 trillion per day. This means dense liquidity which makes it easy to get in and out of positions.

• Trade whenever you want: There is no opening bell in the Forex market. You can enter or exit a trade whenever you want from Sunday around 5pm EST to Friday around 4pm EST.

• Ease of access: You can fund your trading account with as little as $250 at many retail brokers and begin trading the same day in some cases. Straight through order execution allows you to trade at the click of a mouse.

• Fewer currency pairs to focus on, instead of getting lost trying to analyze thousands of stocks.

• Freedom to trade anywhere in the world with the only requirements being a laptop and internet connection.

• Commission-free trading with many retail market-makers and overall lower transaction costs than stocks and commodities.

• Volatility allows traders to profit in any market condition and provides for high-probability weekly trading opportunities. Also, there is no structural market bias like the long bias of the stock market, so traders have equal opportunity to profit in rising or falling markets.

While the forex market is clearly a great market to trade, I would note to all beginners that trading carries both the potential for reward and risk. Many people come into the markets thinking only about the reward and ignoring the risks involved, this is the fastest way to lose all of your trading account money. If you want to get started trading the Fx market on the right track, it’s critical that you are aware of and accept the fact that you could lose on any given trade you take.

Syllabus Of All Chapters.

About Nial Fuller.

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