Open on a continuous basis from 5AM EST Sunday to 4PM EST Friday, forex market is an international market for trading of currencies of various countries. The market is not regulated by any specific organization. The credit agreement between a buyer and the seller is the main binding force in its operations. Today, most countries have set up their own individual associations to regulate their forex traders and brokers.
The Uniqueness Of Forex Market
The forex market is unique in many ways. First of all there is no system of commission. The forex brokers earn money by facilitating the trade itself and taking a portion of the spread or the difference between the buying and the selling price. The second major feature of the forex market is that the chances of misuse by a single person or entity are minimal. Since millions of dollars are traded on this market on a daily basis, no individual can even hope to influence the demand and supply forces that are the sole determinants of the forex values. This makes the forex market one of the most fair and free financial markets today.
An investor can make a trade any time he wishes since the forex market is operational on a continuous basis. The forex market trading is conducted over three regions. It begins in Australasia and is followed by trading sessions in Europe and North America. As markets in one region close, markets of another region open thus making forex trading a continuous process.
The next feature of the forex market is that it does not involve a physical exchange of the currencies being traded. Instead all trades are done through computers and telephones and netted out according to the market price. Thus the forex market is a purely speculative market. An investor does not need to hold a currency in hand to trade in it.
An investor should also know that a trade in the forex market will always involve two currencies, one which is being bought and the second one which is being sold simultaneously. When one buys a currency he/she is in a long position while the sale of a currency puts one in a short position. So a trade always includes two currencies and is represented by letter combinations like EUR/USD or JPY/USD. In this combination the first letters represent the currency being bought or sold. Say in a combination of buy EUR/USD, Euro is being bought in anticipation of a future increase in its value in comparison to the US Dollar. Similarly a sell JPY/USD transaction will mean that you are selling the Japanese Yen since you expect its value in comparison to the US Dollar to decline.
Provides A Leverage Opportunity
The forex market also provides an investor an opportunity to leverage. This means that the broker who is handling an investor’s account provides the latter with a loan to make bigger trades. The first step an investor should take after deciding to take up forex trading is to open a margin account with a broker. Depending on the size of the broker and the size of the position the investor wishes to trade, leverage is provided. The amount of leverage provided by a broker varies from 50:1 to 200:1. The standard trade involves 100,000 units of currency and the general leverage provided on this is 50:1 or 100:1. Although this leverage level appears to be quite high, one should take note that the currency prices usually change by less than 1% during the intra day trade. Although leverage can significantly boost an investor’s profits, it can also increase the amount of potential losses if the currency in which one is trading moves in the opposite direction.
Deals In Both Spot And Forward Trading
In addition to spot trading which means closure of a trade with immediate payment, forex market also deals in forward or future trades. In the case of a forward trade it is not the actual currencies that are being traded. Instead the two parties enter into an agreement to buy or sell a particular currency for a specific price at a specific date. These future contracts are also bought and sold with clearance and settlement done through the public commodities markets.