The Foreign
Exchange Market, widely known as “Forex”, is the global market, for the purpose
of buying and selling of currencies. It is the largest and most liquid financial
market in the world. It averages a daily traded volume of US$5 trillion (which
covers the entire global exchange market). Retail traders trade “Forex” on the
spot, and that covers just US$1.5 of the whole global traded volume ofUS5$
trillion.
When the
daily traded volume of “Forex” is discussed, what is generally meant is the
daily volume of “on -the-spot” retail traders. This daily traded volume
eclipses the daily turnovers of other financial market giants such as The
United States Treasury Bond Market (US$300 billion), New York Stock Exchange
(US$22.4 billion), Tokyo Stock Exchange (US$18.9 billion) and London Stock
exchange (US$7.2 billion).
Following
the abolishment of fixed currency exchanges, “Forex” Market was established in
1971; which led to valuing of currencies at “floating” rates, determined by the
forces of demand and supply. “Forex” grew through the years to became the
world’s most traded financial market till the liquidity of the present-day
daily turnover of US$1.5 was achieved
“Forex”
trading, which involves the trading of currencies, is the simultaneous buying
of one currency and selling of another, which is done through a broker. These
currencies are traded in pairs and the price of a currency in a pair reflects
the economic well-being of the country of such currency. Currency pairs are
divided into three, which include: “The majors”,” The Minors” and “Exotic
pairs”.
“The Major”
are the world’s most traded and most liquid currency pairs. These currency
pairs contain the U.S. Dollar (USD) on either of the sides of all the pairs.
These include GBP/USD, USD/JPY, EUR/USD, NZD/USD, AUD/USD, USD/CAD and USD/CHF.
There are
also currency pairs called “The Minor”, which are the currency pairs that do
not contain the U.S. Dollar. Most “Minor” currency crosses are derived from
three major non-U.S. currencies. These are: GBP, EUR and JPY. These three major non-U.S. currencies are
crossed with other non-U.S. currencies to form “The Minor” currency pairs.
These include but not limited to: (GBP) GBP/CAD, GBP/CHF, GBP/AUD, and GBP/NZD;
(EUR) EUR/JPY, EUR/AUD, EUR/CAD, EUR/NZD, EUR/CHF and (JPY) GBP/JPY, CHF/JPY,
NZD/JPY, CAD/JPY and AUD/JPY.
“Exotic
“currency pairs are the currency pairs that are not hugely traded and that
contain a major currency, which is paired with the currency of a developing
nation, such as Singapore, Norway or Sweden.
“Exotic”
currency pairs are subject to brokerage scrutiny, for there is no generally
acceptable paring representation of these pairs. Depending on the broker, some
of which have been seen used include USD/SGD, USD/NOK, USD/SEK, USD/MXN, USB/THB
and USB/DKK.
It is worthy
of note, that these currency pairs are not widely traded and as a result of
that, the transaction costs associated with trading them are always high.
About 95% of “Forex” traders trade
for profit, which is usually based on speculation. While the remaining 5% of
the daily traded volume is accounted for by governments or corporations that
buy or sell products or services in foreign countries and would have to convert
profits made in foreign currencies to their domestic currencies. The same thing
is done by an emigrant leaving the shores of their country for another country.
They would need to change the currency of their country to that of the country
they are going to, which could be done both domestically and internationally.
As opposed to some financial markets such as NYSE, LSE, JSE
etc, the “Forex” market is considered an Over-the-counter (OTC) or “Interbank”
market as a result of the fact that it is run via an electronic network, within
a network of banks or over the telephone over a 24-hour period. A real 24-hour
market which commences every business day in Sydney then moves across major
global financial centers in Tokyo, London and New York.
The “Forex” OTC market is the largest traded in the world
which involve participants like individuals and organization. The “Forex”
market is influenced by social, economic and political occurrences and the
participants can make profits, as well as losses caused by the effects of the
occurrences.
The dollar is the most traded currency, taking up to 85% of
all the activities of all the market transactions. The Euro is the second
traded while the Yen is the third. Most of these trading activities are based
on speculation which is as a result of “intraday price movements”. The trading
activities carried out by speculators is said to be more than 85%. The
speculation amounts to liquidity, which makes the amount of traded volume very
high. From traders’ points of view, liquidity is very important, for it
determines how easily prices can change at a particular period of time, and
that makes it accessible to anyone to buy and sell currencies.
There are a plethora of advantages to trading in the “forex”
market, which include:
Trading Capital
“Forex” trading may require little capital for trading, as
against other financial markets. Anyone can participate in the “Forex” market
with as little as US$1 to trade a micro account, and this gives the chances to
open up to 1000 units. One lot of 1000 units of currency is equivalent to 1
contract in micro account and 1 pip (the smallest movement currency rate which
goes up or down) equals $0.1 in a micro account. A mini account gives over
10,000 units of currency and its 1 pip equals $1, while a pip of that of a
standard account equals $10 with over 100,000 units of currency.
Market Movement
Unlike most of other financial markets, “Forex” trading can
be profitable in both “bullish” and “bearish” (upside and downward) movements
of the market. A trader can make profits from all two movements of the market,
in as much as they are going along with the movement. Stock traders need the
prices of stocks to go up for profit to be made.
High margin Opportunity
In “Forex” trading, small amount of money can be used to
control big position with the opportunity of high leveraging. For instance, one
could use the leverage of 1:100 to control an amount that is almost 100 times
bigger than their capital. It is majorly “Forex” market that offers such
opportunity.
Round-the-clock Trading Hour
The “Forex” market offers the opportunity to be accessed 24
hours. Unlike some financial markets, “Forex” market gives a 24-hour trading opportunity
which gives the advantage of convenience.
However, “Forex” trading (especially on high margin) is
associated with high level of risk, and may not be suitable for everyone.
Before making the plan of going into “Forex” trading, one should consider their
level of experience, training, financial buoyancy and ability to take risk. It
is advisable one should not trade in the “Forex” market with the money they
cannot afford to lose.
