Forex Market Details and Specifics

FOREX (FX) or the foreign exchange market is an over the counter market place where currencies are bought and sold in pairs based on floating exchange rates. The communication for buying and selling is usually carried out through phone or internet or any other viable and affordable means. Trading on an exchange in the forex market is not centralized as found in the stock and futures markets.

The foreign exchange market is global in nature and is the largest financial market where almost $2 trillions are traded everyday. The forex trade like any other financial market is a combination of technical and fundamental strategies combined in an intelligent package.

About 5% of daily turnover is from companies and governments that exchange products and services in a foreign country. The profits gained from buying and selling goods and services are thus in terms of foreign currencies that must be converted into their domestic currency. So forex trading is a basic requirement. The remaining 95% of forex trading is for profit and speculation.

Speculators find their best trading opportunities in markets that are highly volatile and offer the best liquidity. The major markets are the most commonly traded currencies in the forex market. These are US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

Forex market attracts investors for its non stop access, high liquidity and high volatility leading to profits even or small margins. The forex market is not like the securities market which offers you 7-8 hours of trade. Forex market is open 24/7 from Monday to Fridays. It is easily accessible and safer to invest because of a colossal liquid market.

Forex market has standard instruments for risk control and management. There are chances to secure profits even when the market is not on the rise. Leveraged trading with low margin requirements is another strong feature of the forex market. Moreover the market provides real time quotes free of any charges and zero commission trading is what attracts buyers and sellers who do not want to waste time and money for third party intervention.

Forex trading is always done in pairs like USD/EUR. The first currency on the left hand side is the base currency in forex market which is the unit currency against which others are measured. The value of base currency is always considered 1.

Globally USD or US dollar is considered as the base currency. Most of the currencies are measured in terms of USD. This rate of exchange of one currency with the USD is known as direct rate. Thus USD/JPY = 110.1 implies that 1 unit of USD can buy 110.1 units of JPY.

Sometimes currency pairs include US dollar but the other currency in the pair is not measured/ valued against USD. This is the case where USD is the counter currency or the secondary currency and the base currency is some other currency. So, GBP/USD = 1.5800, implies that 1 GBP is equivalent to 1.5800 USD. The "Majors" in forex market include USD/JPY, USD/CHF and USD/CAD.

If USD is not included in the traded currency pair then the rate is known as cross rate. The cross rate actually allows direct conversion of one currency to another without converting the first one into USD. A few example cross quotes are GBP/EUR or EUR/CHF and GBP/JPY. The currency pairs in which Euro is the base currency are EUR/CHF, EUR/ CAD, EUR/GBP and EUR/JPY.

While USD being the base currency if the currency quote goes up or experiences a rise, then this implies that dollar has appreciated in value and emerged as a stronger currency. So USD is now capable of buying more of the other currency in the pair than before.

The exceptions to this rule are the Euro (EUR), British pound (GBP) and the Australian dollar (AUD). GBP/USD= 1.7366implies that 1 unit of British pound equals 1.7366 U.S. dollars. Here USD is not the base currency and rise in quote implies that dollar has depreciated in value. So more USD is now required to buy Pound, Australian dollar or Euro.The 'bid' is the price at which the base currency is sold (and simultaneously the counter currency is bought). And 'ask' is the price at which the base currency is bought (and simultaneously the counter currency is sold).Leverage trading or trading on margin is the feature of forex market that attracts investors and traders. Here you do not have to hold the full value in your account to start trading. You can be trading at 1% margin implies that you can trade $100000 hen you hold only $ 1000 in your account. The other $99,000 is collateralized and you pay no interest for this. This is referred to as 100:1 leverage. The available leverages in forex market are 50:1, 100:1 and 200:1.

With leverage, the return on a smaller market is much higher. More importantly, leverage contributes to increase in the buying power of the forex traders and helps in less consumption of capital into the trade. Again it is equally important to understand that leverage magnifies the profits as well the losses. The account balance should be monitored regularly for minimizing losses. Many traders use stop loss orders to limit the downside risk they pose.

External Factors that Influence the Forex Market

When interest rates are raised in a country then this automatically attracts foreign investors. The currency become stronger or appreciates in value. So anticipating that the currency has become stronger investors will buy more of that currency.

Again if investors believe that the currency has appreciated much and there is no chance in the near future for the currency to appreciate more then they will switch to another currency that has higher possibilities to appreciate.

Factors like increasing gold prices and oil price risks also have effects on forex trading. Gold has been a country-neutral alternative to the US dollar, so a rise in gold prices can lead investors to buy more Euros and sell off USD as the dollar has been perceived to be inversely related to gold prices. Again the currencies of major gold producers like Australia and Canada can experience an upturn in this circumstance. Investors would establish long positions in these currencies.

USA’s very high oil dependence on foreign nations makes the dollar more sensitive to oil prices than other countries. So a rise in oil prices is almost always translated as detrimental to the dollar.

The forex market actually lets you trade on a global scale provided you understand the complexities that are catalyzing the forex trading opportunities every moment. The market is erratic and has its own unique essence that you are required to capture judiciously if you want to be successful..