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Part 5 of 5 on our video series: What Is Forex?
Different Ways to Trade Forex
There are a number of different ways to trade Forex. I will outline the main ones below:
In the spot market, currencies are traded immediately or “on the spot,” using the current market price. What’s good about this market is its simplicity, liquidity, tight spreads, and round-the-clock operations. It’s very easy to participate in this market since accounts can be opened with as little as a $25! (Not that we suggest you do)
Futures are contracts to buy or sell a certain asset at a specified price on a future date (That’s why they’re called futures!). Forex futures were created by the Chicago Mercantile Exchange (CME) way back in 1972. Since futures contracts are standardized and traded through a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.
An “option” is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date. If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.
An ETF could contain a set of stocks combined with some currencies, allowing the trader to diversify with different assets. These are created by financial institutions and can be traded like stocks through an exchange. Like forex options, the limitation in trading ETFs is that the market isn’t open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs.
To go view the next series “why trade forex?” please click HERE to go back to part 4 please click HERE
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Part 4 of 5 on our video series: What Is Forex?
Unlike other financial markets like the New York Stock Exchange, the forex spot market has neither a physical location nor a central exchange.
The forex market is considered an Over-the-Counter (OTC), or “Interbank”, market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
The forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations.
In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.
The chart below shows the ten most actively traded currencies.
The dollar is the most traded currency, taking up 84.9% of all transactions. The euro’s share is second at 39.1%, while that of the yen is third at 19.0%. As you can see, most of the major currencies are hogging the top spots on this list!
You’ve probably noticed how often we keep mentioning the U.S. dollar (USD). If the USD is one half of every major currency pair, and the majors comprise 75% of all trades, then it’s a must to pay attention to the U.S. dollar. The USD is king!
In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises almost 62% of the world’s official foreign exchange reserves! Because almost every investor, business, and central bank own it, they pay attention to the U.S. dollar.
There are also other significant reasons why the U.S. dollar plays a central role in the forex market:
* The United States economy is the LARGEST economy in the world.
* The U.S. dollar is the reserve currency of the world.
* The United States has the largest and most liquid financial markets in the world.
* The United States has a super stable political system.
* The United States is the world’s sole military superpower.
* The U.S. dollar is the medium of exchange for many cross-border transactions. For example, oil is priced in U.S. dollars. So if Mexico wants to buy oil from Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn’t have any dollars, it has to sell its pesos first and buy U.S. dollars.
One important thing to note about the forex market is that while commercial and financial transactions are part of trading volume, most currency trading is based on speculation.
In other words, most trading volume comes from traders that buy and sell based on intraday price movements.
The trading volume brought about by speculators is estimated to be more than 90%!
The scale of the forex speculative market means that liquidity – the amount of buying and selling volume happening at any given time – is extremely high.
This makes it very easy for anyone to buy and sell currencies.
From the perspective of an investor, liquidity is very important because it determines how easily price can change over a given time period. A liquid market environment like forex enables huge trading volumes to happen with very little effect on price, or price action.
While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day.
To view part 5 of what is Forex please click HERE to go back to part 3 please click HERE
This article is categorized under Guides.
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Part 3 of 5 on our video series: What Is Forex?
The currency pairs listed below are considered the “majors”. These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.
Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the “crosses.” Major crosses are also known as “minors.” The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.
Exotic Pairs
It isn’t unusual to see spreads that are two or three times bigger than that of EUR/USD or USD/JPY. So if you want to trade exotics pairs, remember to factor this in your decision.
To view part 4 of what is Forex please click HERE to go back to part 2 please click HERE
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Part 2 of 5 on our video series: What Is Forex?
What Is Traded?
Simply put MONEY.
Think of it as buying a share in a particular country, similar to buying stocks of a company. The price of the currency is a reflection of what the market thinks about the current and future health of that particular country’s economy.
For example, if you were to buy the USD (United States Dollar) you’re betting that the American economy is doing well, and will hopefully improve more as time goes on. Once you sell them back you will hopefully end up with a profit.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.
Major Currencies
Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.
Take the USD for instance. US stands for United States, while the D stands for dollar.
The currencies included in the chart above are called the “majors” because they are the most widely traded ones.
To view part 3 of what is Forex please click HERE to go back to part 1 please click HERE
This article is categorized under Forex Basics.
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Part 1 of 5 on our video series: What Is Forex?
In this video we give the very basics on what Forex is, the example we give is a situation many (if not all) of us have been involved in at some point.
When you go on holiday to a country that uses a different currency to your home country, you are going to need to exchange your money. If I go to the USA on holiday I am going to have to exchange my British Pounds into dollars and in doing so I have essentially participated in the Forex market! (I have exchanged one currency for another)
Now before I go back home (or when I am at home depending on how lazy I am) I will exchange the dollars back into pounds, I might notice that the exchange rates have changed from the time I left to the time I arrived back home and it is these differences in the exchange rates that allow us to make money in the Forex Market.
The Forex market is the largest financial market in the world. With trading volume often exceeding $4,000,000,000,000 ($4 trillion if you find it hard counting all the zero’s) compared to around $74 billion from the NYSE (Ney York Stock Exchange) and around $7 billion from the London stock exchange I am sure you can see how huge this market really is.
The graph below shows you the size differences between the Forex Market, New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and will hopefully put things into perspective:
Although the $4 trillion covers the global Forex Market only around $1.50 trillion is made up of retail traders (you and me) I say only but when you compare that to the NYSE it is still a huge number.
To view part 2 of what is Forex please click next below.
