🏛️ The Foreign Exchange (Forex) Market
Forex stands for FOReign EXchange and is a global market where world currencies are traded against each other. The Forex market is enormous, with daily trading volumes of around 7 trillion dollars. Currency values fluctuate based on actual monetary flows as well as expectations about global economic conditions.
24/5 Operation: Trading runs continuously across major global financial centers—Sydney, London, and New York.
High Liquidity: Allows fast execution of large trades with minimal impact on prices.
🌍 Where is Forex Situated?
Forex operates as a decentralized network, functioning much like the internet (World Wide Web). This means every order from a trader is executed within a global demand and supply network called the ECN (Electronic Communication Network) of banks. This setup adds reliability and transparency to Forex transactions, but most importantly, it provides liquidity, which results in lower transaction costs.
- Decentralization: No central exchange; all transactions take place electronically through interbank networks.
- US Dollar Domination: The market is dominated by the U.S. dollar, involved in 87% of daily trades, followed by the euro (33.4%), yen (23%), and pound (11.8%).
- Growth: Forex is projected to reach $1.4 trillion by 2030, growing at an annual rate of 8.7%.
🕰️ Forex market Milestones
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Bretton Woods (1944): Established fixed exchange rates with ±1% fluctuation bands.
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Collapse (1971): Nixon ended the gold convertibility, resulting in the shift to floating exchange rates.
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Electronic Trading (1973): Reuters introduced screen-based trading, replacing phone calls and speeding up transactions.
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Retail Access (1982): Launch of the first U.S. retail currency pairs, opening Forex trading to individual investors.
- Modern Forex Market (2000s): Hundreds of online Forex brokers have emerged, providing anyone with access to the global Forex market.
👥 Forex Market Participants & Functions
The Forex market includes many different types of participants, with the most important being:
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Central and Commercial Banks
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International Trade Companies
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Forex Brokers (ECN, STP, and Dealing Desk brokers) 🔗 COMPARE: » Forex Brokers
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Large, Medium, and Small Institutional Investors (e.g., investment companies, hedge funds)
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Retail Traders
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World Travelers
Key Functions of the Forex Market
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Transfer Function: Facilitates cross-border currency conversion for trade settlements.
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Credit Function: Provides short-term financing to importers and exporters.
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Hedging: Reduces currency risk using tools like forwards and options (e.g., locking in EUR/USD rates for future payments).
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Speculation: Traders seek to profit from exchange rate fluctuations (e.g., shorting USD if Federal Reserve rate cuts are anticipated).
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Arbitrage: Exploiting price differences between markets (e.g., buying EUR in London and selling it in New York).
✅ What are the Advantages of Trading Forex?
Forex trading offers some unique advantages:
(1) Enormous liquidity, which translates into minimal transaction costs (measured mainly by the spread—the difference between buyers’ and sellers’ prices).
(2) High leverage, allowing you to trade with more funds than you hold in your account; a common leverage ratio in Forex trading is 30:1.
(3) A wide variety of options, including hundreds of brokers, numerous strategies, manual and automated systems, signal providers—you name it!
(4) Trading available 24 hours a day, five days a week (24/5), with access via desktop and mobile devices.
(5) Attractive Forex promotions available at any time, such as welcome bonuses or even no-deposit bonuses.
🕒 Forex Sessions
There are three trading sessions: 1) New York Trading Session, 2) London Trading Session, and 3) Tokyo Trading Session.
Forex Market Trading Hours
The Forex market is an OTC (Over-The-Counter) interbank market that operates 24 hours a day. It opens at 21:00 GMT on Sunday and closes at 21:00 GMT on Friday.
Actually, there are two Forex time zones, the winter, and the summertime zone.
1) The Winter Time Zone (October to April)
|
Time Zone (Open-Close) |
EST |
GMT |
|
8:00 AM |
1:00 PM |
|
3:00 AM |
8:00 AM |
|
7:00 PM |
12:00 AM |
2) Summer Time Zone (April to October)
|
EDT |
GMT |
|
8:00 AM |
12:00 PM |
|
3:00 AM |
7:00 AM |
|
8:00 PM |
12:00 AM |
💱 Three (3) Categories of Forex Currencies
Currencies are traded in pairs—you buy one currency and simultaneously sell another. In any currency pair (for example, EUR/USD), the purchased currency is called the Base Currency (EUR), and the sold currency is called the Quote Currency (USD).
Forex currencies are divided into three (3) major categories:
(a) Majors: These are the most popular and least expensive currencies to trade, such as EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD.
(b) Minors: These are popular currency pairs but less so and less liquid than the Forex majors.
(c) Exotics: These are the least popular Forex pairs, which means trading them usually involves higher spreads.
📝 Forex Lot Sizes
A lot in Forex trading is the standard unit size for any transaction. There are three lot sizes; beginners typically start with the micro lot:
(i) Micro Lot → Suitable for Forex beginners; the size is $1,000 (allowing you to open positions worth just a few US dollars).
(ii) Mini Lot → Suitable for advanced traders; the size is $10,000.
(iii) Standard Lot → Suitable for professional traders; the size is $100,000.
🔗 COMPARE: » Forex Brokers Online | » Forex Bonus
🔗 Get more answers about what is Forex: » What is a Forex Account | » What are Forex Signals | » What is ECN Forex Trading | » Forex Trading Orders | » What is Forex Scalping | » What is a Forex Broker | » Forex Trading Styles | » What is Forex Robot (Expert Advisor) | » What is MetaTrader
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