Forex Trading Market
Definition
The forex market, also known as foreign exchange, fx or currency market, is a global decentralised market, in other words, over-the-counter (OTC) market where currencies are traded.
Role
This foreign exchange market determines foreign exchange rates for each currency. This includes all aspects of buying, selling and exchanging currencies at specific and predetermined prices.
Participants
Commercial banks, foreign exchange brokers, central banks, MNCs (non-bank participants), individuals and small businesses can participate in the forex market.
Volume
The forex market is by far the largest financial market in the world, even compared to the stock market, as it has a daily volume of $6.6 trillion.
Liquidity and Volatility in the Forex Market
These two terms are often heard around the forex market. It is said that the forex market is the most liquid financial market around the globe. That is true. But what does it actually mean for you and your trading?
Liquidity is about how active a market is. This is determined by the number of traders who are actively trading as well as the volume they are trading in total. What makes the forex market so liquid is the fact that one can trade 24 hours a day during weekdays. Also, as already mentioned, it is the largest market in the world, with nearly $6 trillion traded daily. Liquidity is not something stable, but it rather changes as financial centres around the globe open and close throughout the day. However, overall high volumes of forex trading keep moving all the time.
Volatility on the other hand, refers to how market prices change drastically. Price volatility is highly affected by market liquidity in that lower liquidity equals bigger volatility and vice versa. Nevertheless, the more volatile a financial market is, the bigger opportunities there are to buy or sell assets. If the market is not moving, it is pointless to hold onto your capital. Therefore, volatility in the forex market is great. If we take the USD currency as an example, it is actually normal to see a price move of around 50-100 pips almost any day of the week. This could bring a potential loss or gain of 500-1,000 USD, given that 1 lot is traded.
EUR/USD
USD/JPY
AUD/USD
GBP/USD
USD/CAD
Why Forex is the Best Market to Trade?
One of the main benefits of the forex market is volatility as previously mentioned, because traders always look for volatile markets and instruments. Accessibility is another benefit. Compared to other financial markets, there is a rather low capital requirement, such as 100 USD. Also, one can easily open a trading account from their computer, submit the relevant documentation and perform a deposit. For beginner trades there is also a demo account with which they can practise trading before entering with real money. There are also greater possibilities with forex, meaning that traders can sell assets they do not really own. Day traders refer to selling or shorting, when they sell assets before buying them, hoping the price will go down. This is also known as going short on a position. Last but not least, investors can trade forex with a margin and leverage, which both concern borrowing money to trade with a bigger amount than your initial capital.
Keep in mind that more traders trading at the same time usually results in prices making small movements upwards and downwards. However, sudden fluctuations are also possible in the forex market. Currencies are not only affected by price movements but by political, economic, and social events, which also cause volatility. Traders should always be on top of current events and keep their finger on the pulse of the latest financial news in order to spot potential profits and avoid potential losses.