There are more reasons to have exposure to the forex foreign exchange market beyond currency diversification. Once you do your homework, you will realize that the foreign exchange market is among the best-performing assets for traders and investors. This guide will explain what is the forex market and will present the 8 main features of the forex market that every trader should know.
What is the Forex Currency Market?
The foreign exchange, foreign exchange, or forex market is where currencies are traded. Coins are important to most people around the world, whether they realize it or not because coins must be exchanged for trading and business. If you are living in Brazil and want to buy cheese from Europe, be it you or the company where you buy the cheese, you have to pay the Europeans for the cheese in euros (EUR). This means that Brazil, the importer, would have to exchange the equivalent in value of the Brazilian Real (BRL) in euros. This applies equally to travel. A Brazilian tourist in the USA cannot pay in BRL to see Wall Street because it is not the locally accepted currency. As such, the tourist has to exchange all the BRL for the local currency, in this case, the American Dollar, at the price that is in the market.
A unique aspect of the foreign exchange market is that there is no central market for foreign exchange. Rather, forex trading is handled OTC, this means that all transactions are carried out with computer networks between traders spread around the world, instead of a centralized market. The market is open all day (24 hours a day), 5.5 days a week, and the coins are traded globally in the world’s leading financial centers such as London, Tokyo, New York, Frankfurt, Zurich, Singapore, Hong Kong, Paris, and Sydney- across all time zones. This means that when US trading day ends, the forex market starts in Tokyo and Hong Kong. As such, the exchange market can be extremely active at any time of the day, with quotations constantly changing.
Here we mention the 8 main advantages of the Forex market that make it one of the most attractive markets for investors and traders globally.
Characteristics of the Foreign Exchange Market
- The best Risk/Benefit potential
The foreign exchange market offers one of the best opportunities of any financial market in terms of risk/profit, YES ( and a large YES) you know how to exploit it. The availability of forex leverage means the use of borrowed funds to control large blocks of money and thus magnify the gains and losses, creates an unparalleled potential to make profits for those with limited capital YES(and, again a great YES) learn how to handle the risk of loss. Let’s take an example, with leverage 1:100, 1% move means a 100% gain. It also means a 100% loss.
This allows us to make substantial gains in small movements in prices. However, as mentioned above, this means:
- For $1 risk in your account, you can control $100.
- For $1,000 risk in your account, you can control $100,000.
Many of the following articles talk about how to minimize the risk of large losses while maximizing the chances of making a profit. That involves learning to cut down on lost transactions on time and letting the winning transactions run so that you can make a profit even if you’re down on most of your transactions.
- The most flexible hours
The exchange market works continuously for 24 hours, 5.5 days a week, from Sunday at 5:15 P.M. EST until Friday at 5:00 P.M. EST. So, for those who work or have family commitments, they can negotiate a fully liquid market at the time that is most convenient.
- The lowest costs to start and operate
Forex trading is among the financial markets with the lowest cost to start and operate in terms of time and money, referring to the capital to operate, training, and equipment to operate. Like most markets, you don’t need thousands of dollars to get us started. This is why, at Forex, we can perfectly trade with high leverage (borrowed money), usually 1:100 or sometimes more.
In theory, you can usually start with as little as $100. However, you will learn that you can reduce risks and be more likely to make a profit with at least a few thousand dollars (or its equivalent) if possible. As we will see later, small forex positions that are available like mini and micro allow traders with more limited funds to trade smaller positions, keeping the share of risk capital at acceptable levels. More about this later.
Training and cost of equipment: Forex brokers typically provide fully equipped platforms and data sources for free, and the best forex brokers offer an extensive amount of free training and market analysis files. With online brokers, traders usually keep a minimum or minimum transaction volume balance to obtain quality charts and platforms from their brokers or access worthwhile research.
Free practice accounts: Even better, they typically offer practice with all the real circumstances, or, demo accounts that allow newbies to simulate much of the trading experience and practice with virtual money until they are ready to risk their capital.
Low transaction costs: Most forex brokers do not charge fees, commissions, or hidden charges. They earn money in the difference, called the spread forex, between the purchase and sale price, typically a few tithes, called pips, of the price. Depending on the size of the negotiated lots, a typical spread of 2 pips, 4 pips will be the total to open and close a position, which can cost between $0.40 and $40. Transaction costs are usually competitive when compared to online stock brokers.
- The exchange market offers the best liquidity
A liquid market means you have many sellers and buyers. The more sellers and buyers there are at a given time, the more likely it is that you will get a market price just when you buy or sell. The more liquid it is, the less likely a few insignificant orders or players will move prices in a wild and unpredictable way.
Indeed, contrary to the stock market, even the biggest players would have trouble manipulating the price on the main exchange pairs beyond a few hours. There are 2 exceptions to this, a few crooked central banks and Forex brokers. In reality, dishonest brokers are easily identified and it is easy to avoid with some investigation, and the risk of a central bank intervention is usually known or discovered promptly after the first incident, making markets vigilant. The more liquidity a market has, the easier it is to make a profit.
Prices are more stable and fairer, and less related to sudden and unpredictable movements. Generally, you should avoid trading in illiquid markets, except rarely when you’re trying to enter into bargain-price positions offered by those desperate to close a position. The volumes of foreign exchange markets dwarf those of equities. The latest estimates report that the average daily forex volume was around 4.71 trillion, of which retail traders represent 1.5 trillion (USD). That is the importance of the foreign exchange market, that huge volume, circulating 24 hours a day, means abundant buyers and sellers at any time of the day. That means it’s much more likely to get a fair price no matter when you sell or buy. That means you rarely see that you can sell only part of your position.
- Advance warnings of changes in other markets
Foreign exchange markets generally react to changing conditions before other markets, providing a valuable warning of possible changes in trends. As we will learn later, certain currencies tend to move in the same direction as industrial stocks or raw materials, and others tend to act as safe-haven assets like bonds. When these correlations are broken, this can also be a warning of a change in the direction of other markets.
- There is no centralised exchange with specialists maintaining the monopoly power to regulate prices
In the vast majority of stock markets, the largest specialist is a singular entity that serves as a buyer and seller of last resort, which controls the spread, which is the range between the purchase price and the selling price of a share. In theory, they must be supervised and regulated in order to avoid them from abusing the be able to manipulate prices at the expense of the public, specialists are experts in knowing when they can manipulate prices to make you buy more expensive or sell cheaper. In forex, there is no specialist to regulate the individual prices of currency pairs. Rather, there are multiple currency centers and brokers that are competing for your business. Although lack of centralisation complicates regulation, competition and easy access to price information have resulted in competitive quotations.
- There is no rebound rule: Just as it is easy to win on a bearish market, it is easy to win on a bullish market
Just as it is easier to row with the current than against it, it is easier to win by negotiating in the direction of a market trend. Unlike stocks (and other financial markets), in forex, it is as easy to win from the bottom markets as bullies. This is a huge advantage in the forex exchange markets. During an upward trend, when prices are rising, most traders go long, which means they buy an asset in the hope of selling it at a higher price. They’re trying to buy cheap and sell expensive, the classic way that people think is to invest.
During a downward trend, when prices are falling, it is easier to win by trading with the downward trend. So, the more sophisticated traders try to take advantage of the bearish trend and sell short; that is, sell borrowed shares in the hope of buying them in the future at a lower price, to return them and earn by difference-For example, Sell loaned shares at $100 a share, buy them at $70, return them to the broker, and pocket $30 a share. However, most stock exchange centers are controlled and regulated by those who have an interest in keeping stock prices high with restrictions and high sales costs.
- Forex need not be riskier than other markets
Forex has earned a reputation for being overly risky due to a combination of:
- A high failure rate due to novice forex traders who failed to do their homework and know the risks associated with the high leverage usually used in most forex trading.
- Brokers who do not provide us with minimum training to deal with the risks of using leverage. But, you can manage and reduce risks.
-Brokers, which allow you to adjust to leverage to what you can handle, will provide you with mentoring at an appropriate level.
-Ways to trade forex without levers, which are no more risky than an exchange-traded fund (ETF) or a share.
-A variety of strategies to reduce risk in Forex trading, as well as new instruments to make transactions simpler and safer.
As we will see later, making money trading forex can be easier than in stocks and other more traditional asset markets, particularly bear markets. However, you need to do your homework, especially if you do or will do leverage trading, which adds risk and benefit. Part of the task is to learn simpler and more conservative techniques to make it easier to be successful in forex than with those instruments that are used more commonly. Until recently, there was not a single source to learn this more sensitive and conservative forex. No more. This is the only source for bringing these methods together in a single collection of items.
Understanding what is the forex currency market and what are the 8 main features of the forex market, as you have seen, is very important.