What is Forex?
FOREX — the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world. Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with Forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $4.0 trillion in April 2010 according to the BIS triennial report.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.
Why Trade Forex?
Enormous Volume
As was mentioned earlier on, the forex market dwarfs all stock markets of the world in volume. It trades about $4 trillion EACH DAY. To put this in perspective, the New York Stock Exchange (NYSE) trades around $28 billion a day. The entire U.S. stock market trades about $191 billion daily. The Futures market trades about $437 billion daily. None of these even come close to $1 trillion, much less several trillion.What advantage is that to you?
Greater volume means better fills on your orders (less slippage). Slippage is where you click on a market price yet get filled at another price by the time your order can be filled. The more volume at each price level, the better those fills become. Therefore, the forex market offers the least slippage of any market. Keep in mind too that slippage is a “real” trading cost. On top of better fills, the spreads are less which means your costs are less and you can get into profitability sooner in this market due to that. Typical spreads are 2-4 pips on the majors and 4-7 pips on many of the crosses.No Commissions
You have no commissions in this market since you don’t have to go through a broker on your way to the market maker. You simply deal directly with the market maker and therefore you don’t have a broker’s commission. This is a huge savings and allows you to get into profitability much sooner too. For instance, in stocks, you are charged twice (a buy commission and a sell commission). Ouch!24 Hour a day Trading
No restrictions on Short Selling
In stocks, they make it hard to short. Why? They want stocks to go up and not down. They want an upward bias to aid corporate America in growing their stock prices. They have no incentive to help you short a horrible stock or one with declining earnings. However, in forex, you can short just as easily as you can “go long” (buy). The fills are just as quick. There isn’t any need for a firm to check for “shares to borrow” like in stocks. There are no “uptick rules” either. There’s none of that nonsense to worry about. Besides, in currencies, you are always going long one currency in the pair and essentially short the other. So they don’t care which one you are long or are shorting.Who Trades Forex?
If you’re an absolute rookie to forex trading you might be asking yourself how can forex be so widespread and who does trade forex at the end of the day in order for claims to state that there is a massive $3 Trillion traded every day. Well first of all we should explain that besides retail forex traders like the traders that engage in forex trading for free or for real money at markets247.com there is another four our five categories that trade forex on a day to day basis.
The first category that trade forex without them even realizing is consumers when they are in foreign locations away from their home jurisdiction and they engage in shopping for goods or services. As a traveler when you are abroad you have to exchange your currency to the currency of the country you are visiting in order to be able to pay for accommodation, transportation, shopping and other goods or services you are using or purchasing for the location of your visit.
Even when purchasing any of the above mentioned goods or services with a credit card which was issued in your local jurisdiction you should realize that the price for which you are charge for at the visiting country will be charged to your card at the equivalent rate of the time of the transaction.
By using your credit card to pay you can be saving slightly as you will not be called to pay the commission fee charged by banks or a currency centre but nevertheless you are still subject to the rate of the current day to determine what you will be charged on your next bank statement which will be sent to your home address. The volume of transactions as described above may be small in volume but if you consider the overall volume of people that engage in shopping for goods and services when travelling abroad you will soon realize that total sum of these transactions is very, very high.
Businesses buy and sell both services and products as part of their normal conduct of performing their practice on a day to day basis which in many cases might not be limited to the boundaries of their region either due to costs or either due to limitations of offering in products of that nature in their particular region.
What this means is that when a business decided to import a product or purchase outsourced labor from overseas it will be called to pay in foreign exchange. It is only reasonable to understand that these trades need significant volumes of foreign exchange and either might be traded on a day to day basis or either can be traded in large orders when exchange rates are in favor of the purchaser based on circumstances and market conditions.
On a day to day basis businesses need to convert currencies when they perform trading outside the boundaries of their legal jurisdiction; in order to best understand this you should understand that when a business imports or exports products to or from its home country it will have to process or receive a payment in foreign currency; it is only realistic that large business entities convert significant amounts of money back and forth in order to perform their transactions.
What this means is that companies with respected figures in cash flow and revenue might select to trade currencies on a day to day basis based on their prediction of transaction volume in order to have sufficient liquidity of cash flow available at any given time to buy and sell goods. The timing of when a business converts a bulk volume of currency to have on hand can have a large affect on their balance sheet, which is why many businesses use hedging strategies to ensure they do not sustain losses over time due to currency market volatility.
The third segment that adds up to the group of traders that practice forex trading is investors and speculators which trade on international markets either through a direct forex broker or through and online forex platform.
These traders require liquidity in cash flow in order to perform trading in foreign markets; to best understand this we can set a simple example of a trader that originates from Australia where the home currency is the Australian Dollar (AUD) and is buying or selling stocks, bonds or commodities on the Nasdaq were transactions are performed in United States Dollars (USD), this particular trader will require sufficient liquidity in USD in order to perform his transactions; exchanging his home currency on a day when stocks of Google are low and are a good choice to buy might be such an efficient decision not because the actual stock might not be promising but because his home currency is just to costly to exchange to USD in order to perform the purchase; what this means is that speculators and traders in many cases maintain balances which they trade to foreign currencies based on currency market prices in order to benefit from promising exchange prices which can prove efficient when a trading opportunity may arise.
The first category is more mathematical or more statistical to be more precise and often has a bigger appetite for risk as this category of forex traders has a tendency to use tactics of constant opening and closing positions and even more sometimes prefer using forex robots for their traders. They tend to use charting tools and quantitive trading models and theories to come to a conclusion where they wish to set their stop loss and how they will construct their trading outline for the day.
The second broad category of traders is a more human or more mild category of traders in terms of tactics and risk appetite as fundamental traders prefer using traditional signals to consider what their trading policy for the day, week or year will be. Fundamental traders dig through the news and enhance themselves with the ability to extract signals from chained reactions of financial or political turbulence which push the forex market to go both up and down. Fundamental traders prefer clearly tracking interest rates, GDP changes, employment statistics, military conflicts, political changes and instabilities or even natural disasters which affect fx rates.
Summing up we would recommend that you do not attempt to categorize yourself in to 1 particular category as each individual has different abilities. Your forex trading pattern is something that will roll out as it goes based on your learning curve.
Consumers
Even when purchasing any of the above mentioned goods or services with a credit card which was issued in your local jurisdiction you should realize that the price for which you are charge for at the visiting country will be charged to your card at the equivalent rate of the time of the transaction.
By using your credit card to pay you can be saving slightly as you will not be called to pay the commission fee charged by banks or a currency centre but nevertheless you are still subject to the rate of the current day to determine what you will be charged on your next bank statement which will be sent to your home address. The volume of transactions as described above may be small in volume but if you consider the overall volume of people that engage in shopping for goods and services when travelling abroad you will soon realize that total sum of these transactions is very, very high.
Businesses
The second category that uses forex trading is businesses as importing goods or conducting any sort of business practice including paying for outsourced services abroad or anything similar will need foreign currency to be concluded. Very similar to what has been described above businesses perform forex trading when conducting usual practices of purchasing products or services with the volume of transactions being the main key difference to consumers.Businesses buy and sell both services and products as part of their normal conduct of performing their practice on a day to day basis which in many cases might not be limited to the boundaries of their region either due to costs or either due to limitations of offering in products of that nature in their particular region.
What this means is that when a business decided to import a product or purchase outsourced labor from overseas it will be called to pay in foreign exchange. It is only reasonable to understand that these trades need significant volumes of foreign exchange and either might be traded on a day to day basis or either can be traded in large orders when exchange rates are in favor of the purchaser based on circumstances and market conditions.
On a day to day basis businesses need to convert currencies when they perform trading outside the boundaries of their legal jurisdiction; in order to best understand this you should understand that when a business imports or exports products to or from its home country it will have to process or receive a payment in foreign currency; it is only realistic that large business entities convert significant amounts of money back and forth in order to perform their transactions.
What this means is that companies with respected figures in cash flow and revenue might select to trade currencies on a day to day basis based on their prediction of transaction volume in order to have sufficient liquidity of cash flow available at any given time to buy and sell goods. The timing of when a business converts a bulk volume of currency to have on hand can have a large affect on their balance sheet, which is why many businesses use hedging strategies to ensure they do not sustain losses over time due to currency market volatility.
Investors and Speculators
These traders require liquidity in cash flow in order to perform trading in foreign markets; to best understand this we can set a simple example of a trader that originates from Australia where the home currency is the Australian Dollar (AUD) and is buying or selling stocks, bonds or commodities on the Nasdaq were transactions are performed in United States Dollars (USD), this particular trader will require sufficient liquidity in USD in order to perform his transactions; exchanging his home currency on a day when stocks of Google are low and are a good choice to buy might be such an efficient decision not because the actual stock might not be promising but because his home currency is just to costly to exchange to USD in order to perform the purchase; what this means is that speculators and traders in many cases maintain balances which they trade to foreign currencies based on currency market prices in order to benefit from promising exchange prices which can prove efficient when a trading opportunity may arise.
Types of Traders
Although it is unrealistic to say that there is only two categories as each forex trader is an individual entity as each trader has different knowledge, a different perspective of micro and macro economics and each trader wishes to achieve a different level of profit with a different ratio of risk involved. In a general outline you can say that there is two categories of forex traders which use different tactics and an overall different style of trading. The 2 broad categories of traders consists of technical traders and fundamental traders.The first category is more mathematical or more statistical to be more precise and often has a bigger appetite for risk as this category of forex traders has a tendency to use tactics of constant opening and closing positions and even more sometimes prefer using forex robots for their traders. They tend to use charting tools and quantitive trading models and theories to come to a conclusion where they wish to set their stop loss and how they will construct their trading outline for the day.
The second broad category of traders is a more human or more mild category of traders in terms of tactics and risk appetite as fundamental traders prefer using traditional signals to consider what their trading policy for the day, week or year will be. Fundamental traders dig through the news and enhance themselves with the ability to extract signals from chained reactions of financial or political turbulence which push the forex market to go both up and down. Fundamental traders prefer clearly tracking interest rates, GDP changes, employment statistics, military conflicts, political changes and instabilities or even natural disasters which affect fx rates.
Summing up we would recommend that you do not attempt to categorize yourself in to 1 particular category as each individual has different abilities. Your forex trading pattern is something that will roll out as it goes based on your learning curve.