Forex Market Definition
The forex market brings together traders with the intention of speculating, exchanging, purchasing, or selling currencies. It is made up of a conglomeration of entities, namely central banks, banks, hedge funds, online forex brokers, commercial firms, investors, and companies that manage investments on behalf of clients.
The forex market is monitored by the Bank for International Settlements, which brings together various central banks. The exchange happens in forex markets. Importantly, there is no centralized marketplace where this occurs. Banks or over-the-counter (OTC) platforms can facilitate this trade.
The latter category can either be online or offline. Online OTC platforms rely on computer networks to function. Traders from different areas around the world communicate via these networks, thereby proceeding with the exchange.
Trading platforms are different. Some mainly deal with currencies only while others deal with currencies and cryptocurrencies.
Also, some have six-working days while others conform to the five-day working system. For those that are operational during weekdays, they are open for 24 hours. It closes on Friday at 5 pm Eastern Standard Time (EST) and reopens on Sunday at 5 pm. The 24-hour functionality accommodates trades from different geographical locations, given that they are in different time zones.
Useful Facts About Forex Market
The forex market is attractive given that it is the largest financial market in the world. On any given day, it supports transactions worth over $5 trillion. It is also appealing because it involves many players; no single entity has a monopoly. It is a global network that is made up of brokers and computers from firms that deal in forex.
Pros Of The Forex Market
- The brokers in forex markets charge commissions or fees. Instead, they are reimbursed through spreads. A spread is the difference between the ask and bid price for a particular currency pair. The former is the buying price while the latter is the selling price. The brokers build their fees into the spreads.
- The market is flexible since one can access it from anywhere 24 hours a day, during weekdays. Furthermore, there is no restriction with regard to the amount of money an individual can trade.
- The forex market allows for high leverage. As such, a trader with limited capital still stands a chance of making huge profits if the currency they buy performs well.
- The forex market is a network that connects computers from different parts of the world. This implies that currencies from different countries are available for trading. As such, it avails numerous opportunities since the trader can buy or sell multiple currency pairs.
- The forex market cannot be controlled by a single entity because it has many players and participants. Also, no company or institution can control the prices for an extended period because they are influenced by market forces.
- The market is highly liquid. This implies that at any time a trader wants to buy or sell currency, they will find someone to trade it with them.
- It has limited barriers to entry. For instance, it is easy for beginners to open an account. The minimum requirement is depositing a small amount of about $25, depending on the broker.
Cons Of The Forex Market
- The large size of the forex market makes regulation hard. As such, the forex market is unregulated. For this reason, traders should be cognizant that, although brokers are meant to facilitate trades, they may not honour contracts leading to losses. Therefore, due diligence is important.
- High leverages may result in high profits. However, it may also result in colossal losses. In this regard, the forex market has high leverage risks.
- Operational management of the forex market is constraining given that it runs for 24 hours. As such, traders have to use bots and algorithms which monitor the market as they rest. Managing positions effectively becomes relatively hard and expensive. Without such measures, traders can easily lose their initial capital investments.
Make Money With Forex Market
The forex market is the largest financial market in the world. Its daily transactions amount to $5 trillion. It is beneficial because it has high leverage, cannot be regulated by one entity, and traders can access it 24 hours a day. The benefits translate to income, provided the trader employs effective strategies.
The forex market opens when the first major market opens for trading. In this regard, it opens when the market in Sydney, Australia starts being operational on Monday morning at 8 am. This is usually at around 7 pm on Sunday in New York. Thereafter, the market is open 24 hours a day and closes when the last major market (New York) closes on Friday at 5 pm.
The FX market is a market comprising many entities, namely banks, hedge funds, and brokers, among others that facilitate the purchase, sale, exchange, and speculation on currencies.
The first step is identifying a reputable forex broker. Upon doing research and signing up for free, the next step is choosing the currency pair. A good broker provides analysis tools that help traders choose the right currency pair in addition to the underlying risks associated with the price fluctuations. The next step is determining whether to buy or sell a currency. The decision to buy should be based on analysis which revealed that the base currency will strengthen against the quote currency. On the other hand, selling should be informed by the belief that the base currency will weaken relative to the quote currency. It is important for the trader to know when to close your trade.
Analysis of the forex market takes two forms, namely technical or fundamental. The former relates to using tools such as charts to identify trends that indicate whether the base or quote currency is likely to weaken or strengthen. The latter entails using economic indicators such as the rate of unemployment, GDP, and interest rates to predict the future performance of currencies.