What is Forex?

The Forex market is the largest financial market in the world, with an estimated global volume in excess of $5 trillion exchanged daily. BIS (Bank for International Settlements) in its triennial report sets the figure in April 2013 at $5.3 trillion, that is an increase from the previous two reports that were $4.0 trillion in 2010 and $3.3 trillion in 2007. It would be reasonable to assume the figure is even higher yet given that two full years have passed since the report.

Forex Definition
The biggest global market, $5.3 Trillion traded daily.
24 Hours Five Days a Week.

That makes for a very liquid market, meaning lots of prices (bids and offers) are being quoted with trades executed all over the world in the same currency at any one time. With so many traders buying and selling contemporaneously this means that price changes are happening constantly, but also tend to happen in an orderly fashion, i.e. gaps or runs on a currency are fairly infrequent, especially in the major currencies.

What is Forex Trading and how does it work?

Being a global market quoted in all major and minor financial centers across the world means that prices and opportunities to trade are available around the clock. When London closes, New York opens and when New York closes, Tokyo opens, creating a continuous market.

There are many countries that have the need to exchange their currency. Each currency needs another currency to be exchanged for. There are more popular currencies that are exchanged between the largest economies, known as "Majors" and lower volume currency pairs known as "Minors." We'll go into these later, but for now, you need to know that two currencies need to be present and they are defined as a "currency pair".

Use a blend of Fundamental News & Technical Charting To Really Understand the Markets.

What is the difference between Forex and the Stock-Market?

One of the greatest aspects of the Forex market is its transparency. Unlike the stock market, the currency exchange market is driven by macro fundamental analysis for the most part, as opposed to micro analysis. This creates a more level playing field, although many traders, at all levels from the retail day trader to the macro global hedge fund trader, also make use extensively of technical analysis. Ultimately a good balance of both technicals and fundamentals is recommended.

Easily accessible information

FX Markets are also easy to follow and trade. Software that allows you to make use of technical analysis tools, known as trading stations, are readily available and most, like Meta Trader 4, are free to use. These tools show price action (the exchange rate price), represented on charts in a number of ways, where each price movement is tracked.

Types: Bar charts, Candlestick charts or Line charts

As there are no centralized exchanges it is difficult to estimate volume traded. Economic data, used in fundamental analysis, is also easily sourced in places like Bloomerg.net or Tradingeconomics.com.

There are also other factors to consider like geopolitical risk that may create economic instability. Russia has been a recent example, over the past years; the latest events, in 2014, with the annexation of Crimea saw the Russian Ruble devalue by 50% within six months.

Along with monetary policy which is determined by each central bank, the members of its board and the central committee will also be a big driver in price movements and long-term trends.

Natural disasters are also capable of having disastrous effects on a local currency. An example was the tsunami in Japan in March 2011, where the Japanese Yen depreciated by nearly 12% in the 2 weeks that followed.

Summary

  • $5.3+ trillion traded each day
  • Available 24 hours per day, 5 days per week
  • One currency needs to ‘buy’ and another needs to ‘sell’ at an agreed price for an exchange to happen
  • Geo-political risk can dramatically change a currency’s value
  • Can be highly liquid/volatile at different times of the day

Actions

Answer the following short questions.

  1. How much is traded per year?
  2. List three things that can affect a country’s currency.