Forex Trading and Brokers
The foreign exchange market – also known as Forex or just FX – is a decentralized global market for the trading of currencies. In terms of trading volume, this is by far the largest market in the world.
The foreign exchange market is not one specific exchange (such as the New York Stock Exchange or the London Stock Exchange). Instead, financial centers around the globe function as hubs or anchors of trading in a network that includes various participants, including large international banks.
The history of foreign exchange trading is very old. As long as there have been different currencies, there have been people wishing to exchange one currency for another. A merchant that traveled from his home to other parts of the world to obtain foreign goods would for instance need to exchange his currency one or more times along the way, both to be able pay for his own needs as he traveled and to make sure he had an accepted currency available when he reached sellers of desirable goods. In major trading hubs, such as capital cities and important ports, professional money changers would be present to cater to these needs and make a profit from the fluctuating exchange rates.
The modern foreign exchange market that we know today emerged in the 1970s, as countries gradually switched from controlled exchange rates to floating exchange rates for their national currency.
A FOREX broker is a company that provides retail investors with access to a FOREX trading platform that enables the investors to buy and sell currencies. Most brokers offer a wide selection of different leveraged FOREX products that make it possible to earn high returns from small market movements. The leverage also increases potential loses and leverage trading is a type of high-risk trading.
Your primary goal when comparing FOREX brokers should be to find one which is regulated by a trusted financial institution, and that has a good reputation on the market. You should also compare the spread they charge as well as the overnight fees. A small spread makes it a lot easier to make money. If you want to be able to use a certain FOREX trading platform then you need to make sure that the broker allows you to use said platform. Not all brokers provide access to the same platforms. MetaTrader4 is by many considered the best forex trading platform for beginners but other platforms such as NinjaTrader and Algotrader are also popular.
Characteristics of the foreign exchange market
- Huge trading volume
- High liquidity, especially for the most frequently traded currency pairs
- Trading from 22:00 GMT on Sunday to 22:00 GMT on Friday.
- Decentralization and geographical dispersion
- Low margins of relative profit
- Using leverage is very common among traders
The interbank market
The interbank market is the top-level foreign exchange market. This is where major banks exchange currencies with each other, either directly or through electronic brokering platforms. The two major platforms are the Electronic Broking Services (EBS) and Thomson Reuters Dealing. Together, they have over 1,000 banks as their clients.
The interbank market is decentralized; there is no specific building that you can visit where the transactions are taking place.
The thee main constituents of the interbank market are the spot market, the forward market and SWIFT.
- The spot marketThis is where currencies are traded for immediate delivery.
- The forward marketThis is where contracts for future delivery is traded.
- SWIFT = Society for World-Wide Internbank Financial Telecommunications.This is a network used to send and receive information about financial transaction. A majority of the international interbank messages are sent through SWIFT. Data from the year 2015 shows that over 11,000 financial institutions in more than 200 countries and territories use SWIFT.
At the foreign exchange market, currencies are traded in established pairs. The value of one currency is thus always expressed in relation to the other currency in that pair. The basic foreign exchange transaction consists of one party purchasing a quantity of a certain currency from another party and paying with another quantity of another currency.
The four most frequently traded pairs are:
EUR/USD: The Euro and the U.S. dollar
USD/JPY: The U.S. dollar and the Japanese yen
GBP/USD: The British pound sterling and the U.S. dollar
USD/CHF: The U.S. dollar and the Swiss franc
Retail foreign exchange trading
Retail foreign exchange trading is a small segment of the foreign exchange market. This segment developed fairly recently, when internet made it feasible to offer platforms for very small-scale forex trading.
Many individuals that are engaging in retail foreign exchange trading do it as a hobby, enjoying the excitement that the trading brings while also – hopefully – making some long-term profits.
If you want to try retail foreign exchange trading, you need to sign up with one of the companies that provide this service, and then make a deposit into your trading account. Many providers will offer you the option of partly trading on credit, where the size of the credit is determined by how much money or other valuables you have in your account. This is known as margin trading or leverage, and it means that even if you just deposit $100 into your account, you can start doing fairly big trades on the platform right away. Naturally, using credit to speculate on the currency market is very risk and you can end up owning the provider much more money than what you deposited.
The first trading platforms for retail forex trading began to appear in the mid-1990s as private internet connections became more widespread than before. In the early days, you had to download the trading software and install it on your computer. Eventually, web-based interfaces were developed where you could trade directly in your web browser without the need to download and install a program.
As technical analysis grew increasingly popular among retail traders, more and more trading platforms began to include charting tools and other useful aids for technical analysis. News feeds are another popular feature in modern platforms, as is automated trading tools. During recent years, social trading has started to catch on, but this field is still in its infancy.
Forex (foreign exchange) trading carries a high level of risk due to the leverage that is often used, which allows traders to potentially make larger profits but also exposes them to greater losses. In forex trading, traders borrow money from their broker to trade a larger position than they could afford with their own capital. This amplifies the potential for profits, but it also amplifies the potential for losses.
There are also risks inherent in the forex market itself. Exchange rates can be affected by a wide range of factors, including economic data, political events, and even natural disasters. This means that forex prices can be highly volatile, making it difficult for traders to predict with certainty how a currency pair will behave.
In addition, there is also the risk of fraud in the forex market. It is important for traders to do their due diligence and choose a reputable broker that is regulated by a trusted financial authority.