Forex Market Components, Purpose, Participants And Transactions
FOREX MARKET
The forex market is the market in which participants are able to buy, sell, exchange and speculate on currencies. The forex markets is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market in the world, processing trillions of dollars worth of transactions each day.
BREAKING DOWN ‘Forex Market’
The foreign exchange market isn’t dominated by a single market exchange, but involves a global network of computers and brokers from around the world. Central banks use their massive buying and selling capabilities to alter exchange rates through their open market activities and in many cases will do so not with profit in mind, but rather for any number of policy reasons. Forex brokers act as market makers as well, and may post bid and ask prices for a currency pair that differs from the most competitive bid in the market.
Components of Forex Market
Intraday Trading
The concept of intraday trade includes all trade strategy assuming closing of positions on the same day in what they were open. Traders, who trade in day, have a small period and count on receiving “fast” profit. Intraday trade allows you to avoid risk of transfer of a position next day.
Trade on News
“Trade in news” is the strategy based on key economic events and data. News trade is, as a rule, the strategy calculated on very short term as the trader has to think, as the Forex market will react to this or that economic event. When the actual economic data strongly differ with expected, often there are considerable changes of an exchange rate that gives to traders the chance to get “fast” profit.
Trade on Fluctuations
Trade on fluctuations includes strategy of receiving profit on the current movements of the market both for a trend, and against it. Trade on fluctuations can be carried out during any temporary periods, however most often this strategy is used at short-term and medium-term trade, with possible postponement of the transaction for the next trading day.
Trade on a Trend
Trade on a trend is based on detection and then following to the certain directed market movement (trend). Trade on a trend can be carried out in any temporary intervals; however it is most effective at long-term trade with continuous postponement of transactions for the next trading days. Also for detection of trends use the indicator (ADX)
Strategy of “Carry trade”
Strategy of “Carry” assumes purchase of currency with higher interest rate and sale of currency with lower that allows getting profit on a difference between them. The traders using strategy of “Carry”, as a rule, conclude long-term bargains. In an ideal, the trader has to wait when the currency with higher interest rate grows concerning currency with lower rate to get even more profit.
Purpose of Forex Market
Liquidity
The main working force for any kind of market is the liquidity of money and when it comes to the Forex market, it is the most financial market in not only a single country but the world which trades around 1.9 trillion dollars every day. Because of the commodities market’s trading around 440 billion dollars a day and the US stock market’s trading around 200 billion dollars a day, the Forex market is much more beneficial.
Trading Time
As trading time is a very important thing for any kind of business, the Forex market remains open 24 hours a day (except weekends) acknowledging the necessity of the traders. That means in the US, it opens officially at 3:00 pm Sunday (EST) and closes Friday at 5:00 (EST). It also allows and enables active traders to choose the trading times in accordance with their necessity and to trade
Leverage
Leverage is decided by Forex account size. In spite of Forex brokers offering leverage up to 400:1 (not that I would ever recommend that kind of leverage), your leverage could be 100:1 depending on your Forex account size. In the stock market, leverage can be high as 4:1. The condition of the commodities market is not so different than the stock market.
Trading Costs
The cost of transaction in the Forex market is only the difference between the buy and sell price of each and every currency pair. There are no other fees, let alone the brokerage fees. There are transaction costs and brokerage fees in both the stock and the commodity markets. In spite of your using discount brokers, those fees add up. Most of all no hidden fee is applicable in the Forex market.
Minimal Investment
You can effortlessly open a Forex trading account by paying only a small account of $300.00. It took $5,000 for me to make the arrangement of opening my futures trading account. Now-a-days, the cost is even more.
Focus
7 major currencies is used for making 85% of all trading transactions. Only in the US stock markets there are 40,000 stocks. There are only 200 or some more commodity markets. Besides, most of them are very illiquid. Even some of them are not traded unless the hedges get there desirable amount.
Participants of Forex Market
Who rules the market?
So, major participants of the Forex market are banks of the world (commercial and central ones). However, large corporations that are engaged in foreign economic activity, investment and hedge funds, brokerage firms, dealing centers and individuals participate in this process as well.
Commercial Banks
Commercial banks carry the main volume of trading. They are involved in taking deposits from individuals and legal entities and operating according to their goals with subsequent return of money to the owners.
Central Banks
The main aim of central banks is to provide financial services to the government and commercial banks of their countries. Their main functions are:
• money supply and exchange rate regulation;
• control of the release of national currency’s notes;
• lending & accepting deposits from commercial banks, as well as control of their activity;
• management of country’s debt;
• maintenance of the gold currency reserves of the country;
• Interaction with other central banks.
Forex attracts more people day after day because of the fact that many people want to benefit from rate fluctuations.
Large Corporations
Large corporations, engaged in foreign economic activity, use Forex to exchange national currency into foreign currency and to forward, conduct short-term deposits, and hedge their future deals. These companies use the services of commercial banks because they do not have direct access to the currency exchange market.
Investment and Hedge Funds
Companies that carry foreign assets invest and place the investor’s funds into different securities as well.
Forex Companies (Brokers and Dealing Centers)
They are agents that bring buyers and sellers together to carry out conversion transactions. They charge for their work either by adding a spread or taking commission fee for a lot traded.
Individuals
Individuals are those who are involved in non-commercial operations of currency exchange, for example, money transfers, currency exchange while visiting foreign countries, etc. Individuals got the chance to use Forex in speculative purposes only in 1986. Individuals may conduct speculative operations via Forex companies.
Transactions of Forex Market
Forward Transaction
A forward transaction is a transaction that is made for the future; this means that the money does not actually come into play until a future date. The buyer and seller agree on a specific, stuck exchange rate for that certain date in the future. Because of the fixed date, the rate is stuck to the choice on that day. The actual market numbers on the day of the transaction do not matter, as the fixed rate cannot be changed. There is no limit on the extent of a future forward transaction, as it is dependent on the buyer and seller alone.
Spot Transaction
The spot transaction is the quickest and fastest way to actually exchange your currency. There is an exchange of two currencies over a two day period on the forex exchange, meaning that no contracts are signed. This allows the transaction to happen at a faster pace.
Future Transactions
These transactions are also forward transactions, and deal with contracts much like the normal forward transactions. The contracts usually deal with a certain amount by a certain date, rather than on a certain date. The contract lasts for the time specified, and are major on the forex market.
Swap Transactions
Swap transactions are easily the most normal and common of the multiple ways to do transactions on the forex market. Swap transactions are also forward transactions, but they do not happen as a trade through the forex market itself. A swap transaction can be confusing at first; two investors agree to change currencies for a certain amount of time. A later date is set for the two investors to change currencies back.
Option Transactions
Option transactions in the forex market common. The foreign exchange options give an investor the right (or option) to exchange money on the forex market. This option has a fixed exchange rate and a specific date. The option transaction is the most prominent in the forex market because of the high traffic and amount of money that is sunk into the currency forex market daily.