What Is The Forex Market?
The Forex market, also referred to as the foreign exchange, is the marketplace for exchanging national currencies globally. The Forex markets are the largest and most liquid asset markets because of trade, finance, and commerce worldwide. It is essential to have the ability to trade international currencies if you aim to conduct foreign business and trade. Having access to different currencies allows us to purchase goods and services, both internationally and locally. There is no central marketplace for foreign currency exchange or physical buildings; it is all done electronically, over the counter (OTC). Currency is traded across most time zones, 24 hours a day at 5 ½ days a week. Because the forex market is active and busy at any given time, price quotes are continually changing up until the U.S trading day ends. The market opens in Tokyo and Hong Kong.
Spot Market
The forex market is sometimes referred to as the spot market. The spot market is where the currency’s price is dependent on supply and demand. Currencies are bought and sold based on trading price. Trading price is determined by factors such as ongoing local and international political situations, current interest rates, and economic performance. A spot deal is completed when parties exchange currency at the agreed-upon exchange rate value; the spot market deals with present transactions instead of with future transactions.
Forwards and Future Markets
A forward’s contract is a private agreement in the OTC market between two parties who aim to purchase currency – in the future – at a predetermined price. In the forwards market, parties determine the terms of the contracts to be bought and sold in a private setting. In the futures market contracts are bought and sold using the public commodities markets standard size and settlement date. The National Futures Association (NFA) regulates the futures market in the United States. Futures trading is not an OTC transaction, a futures contract is a standardized arrangement to take delivery of currency at a predetermined price and on a future date.
Commonly Used Terms
- Forex Account: A forex account is what it used to make currency trades. There are 3 types of forex accounts: Micro accounts that allow for trades up to $1,000 worth of currencies. Mini accounts allow trades up to $10,000 worth of currencies and Standard forex accounts that allow you to trade up $100,000 worth of currencies.
- Ask: An ask also known as an offer is the lowest price you are willing to purchase a currency, typically greater than the bid price.
- Bid: A bid is the price point you are selling your currency.
- Market Maker: A market maker is an individual or a firm who actively provides bids and offers, providing depth and liquidity to the market. A market maker puts out bids in response to buyers.
- Bear Market: A bear market refers to a market experiencing a price decrease among currencies. A downtrend market comes from events such as a depressed economy or a natural disaster.
- Bull Market: A bull market is a market in an uptrend, prices increase for all currency.
- Margin: Margin is the money allocated for a currency trade. Margin money is to ensure that you are able to meet monetary obligations.
- Leverage: Leverage is to use borrowed capital to boost a trader position so they are able to multiply returns.
Purpose of Forex Markets
When doing business internationally, companies take a risk because currency values fluctuate when goods and services are bought or sold outside of their domestic market. Foreign exchange markets allow companies to hedge currency risks by fixing the rate of the transaction. Traders can buy or sell currencies in advance to lock in an exchange rate in the forwards market. There are a lot of factors that affect the supply and demand for currencies, making the forex market more volatile. These factors include tourism, economic strength, geopolitics, and trade flows. The forex market allows for speculation; a trader can buy and sell based on a forecasted exchange rate.
Beginning Forex Trading
Trading currencies is often complex and risky. The interbank market and forex instruments are not standardized and have varying degrees of regulation. There are parts of the world where forex trading is unregulated. The interbank market involves several banks trading with each other around the world. The banks have created internal procedures to determine and accept credit and sovereign risk. The industry-imposed regulations are to protect the participating banks. The following are steps to get started with forex trading.
- Learn about forex. Forex trading requires specialized knowledge, such as understanding what causes the currency price movement.
- Open a brokerage account. To get started you will need a forex trading account at a brokerage, Forex brokers do not charge commissions. Brokers make money between buying and selling prices through spreads.
- Create a trading strategy. Having a trading strategy will help you set guidelines for trading. A good strategy is determined by a realistic review of goals, finances as well as the amount of risk you are willing to take.
- Regulate your emotions. Forex trading can be an emotional roller coaster. It is easy to be obsessed over decisions. It is important to remain disciplined and not get carried away.
- Watch the numbers. It is important to check your positions at the end of every trading day. Trading software usually provides a report of daily trades. Check to make sure account balances have sufficient funds at the end of day for any pending positions.
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