“What is Forex

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 14.04.2020>

Dear reader,

Hi! If you are interested in Forex please read carefully the below article so you can be prepared and fully informed.

 

What Is Forex and Forex Market?

Forex market (foreign currency market) is the global market that allows the exchange of one currency for another. The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world. with its approx $6 TRILLION a day trade volume ( Global Currency Trading Statistics-Bloomberg source 2019 that is available HERE)

(Note: market is the mechanism/system and/or the physical place where buyers and sellers meet for the purchase and sale of provisions of goods or services, trading/exchange of currencies in this case).

> In a local market, at the foreign country,  you exchange the money you have in your wallet into the currency of the country you are visiting. Thus, you are a participant in the Forex Market. You’ve exchanged one currency for another.

> An American visiting Japan: you’ve sold dollars and bought yen at spot USDJPY rate. (1 US Dollar = 106.106 JPY).

Trading/Exchanging currency can be profitable if the rates change. Changes in the exchanges rates allow you to make money in the foreign exchange market.

> “Spot Market” or Spot Forex is a term referring to a market where currencies are immediately exchanged, on the spot, (delivered) at a “cash” price or conversion rate.

Example: If you exchange Swiss Francs for US Dollars at a bank, you are making a spot transaction at whatever conversion rate the bank charges you at that time.

Trader’s Note: This is contrary to futures or forwards where currencies are exchanged later.

How the Forex Market is compared to other markets?

New York Stock Exchange (NYSE), Tokyo Stock Exchange, and London Stock Exchange (LSE): Securities exchanges provide a marketplace for buying and selling corporate stocks and other securities.

> Each exchange has maximum traded volume of the size approx 22 billion USD > the Forex market of course is way bigger since we are talking about trillions USD.

Intercontinental Exchange (ICE) is an American company that owns exchanges for financial and commodity markets and operates 12 regulated exchanges and marketplaces (including NYSE).

 

What type of market is FX Market?

The Forex Market is considered an Over-the-Counter (OTC), or  “interbank” market due to the fact that the entire market is run electronically within a network of banks, continuously over a 24-hour period. It is spread all over the globe with no central location and nowadays is easier for any adult to be a market participant.

Unlike other financial markets, like the New York Stock Exchange (NYSE), or London Stock Exchange (LSE), the Forex Market has neither a physical location nor a central exchange.

 

How is the Forex Market Structured?

Unlike in trading stocks or futures, you don’t need to go through a centralized exchange like the New York Stock Exchange with just one price. Participants in this market include large financial institutions, Banks, ECN Brokers, Retail Investors,  Market Makers.

  • Tier 1 Banks: At the very top of the forex market ladder is the interbank market the participants of this market trade directly with each other or electronically through the Electronic Brokering Services (EBS) or the Reuters Dealing. The largest banks in the world determine the exchange rates.
  • Hedge funds, corporations, retail Market Makers, and retail ECNs.

>Large Commercial Companies. Enter the foreign exchange market for the purpose of doing business. In international cross-border M&As, a lot of currency conversations happens that could move prices around. Governments and central banks, such as the European Central Bank (ECB), the Bank of England (BOE), and the Federal Reserve (FED), are regularly involved in the Forex Market too. They do not have tight credit relationships with the participants of the interbank market and they must do their transactions via commercial banks.

  • Retail Investors.

What are the major currencies?

In this market there are currencies traded called majors. They are the most widely traded ones.

USD, EUR, JPY, GBP, CHF, CAD, AUD, NZD

Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.

The dollar is the most traded currency, taking up 84.9% of all transactions.

 


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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