Forex Education

The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies.
In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. Whether or not you are aware of it, you already play a role in currency trading.The simple fact that you have money in your pocket makes you an investor in a nation's currency. By holding US Dollars, for example, you have elected not to hold the currencies of other nations. When a currency is traded, the transaction is carried out on the Foreign Exchange market (also referred to as the Forex or FX market). The Forex market is the largest financial market in the world, with over $1.95 trillion changing hands every day!

The foreign exchange market is unique because of

• Its trading volumes
• Extreme liquidity of the market
• Its geographical dispersion
• Its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday)
• Variety of factors that affect exchange rates.
• Use of leverage

Unlike other financial markets that operate at a centralized location (i.e., the stock exchange), the worldwide Forex market does not have a central location. According to the Bank for International Settlements, average daily turnover in global foreign exchange markets is estimated at $3.96 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

• $1.005 trillion in spot transactions
• $362 billion in outright forwards
• $1.714 trillion in foreign exchange swaps
• $129 billion estimated gaps in reporting

 

Forex - Foreign Exchange Market

The foreign-exchange ("forex" or "FX") market is the place where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $3.21 trillion per day.
 
There is no central marketplace for currency exchange, rather, trade is conducted over-the-counter. The forex market is open 24 hours a day, five days a week, with currencies being traded worldwide among the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - spanning most time zones.


"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or British Pound/US Dollar (GBP/USD).  The world's leading currencies are Major Currency Pairs

FOREX VS. FUTURES

The global foreign exchange market is the largest, most active market in the world. Trading in the forex markets takes place nearly round the clock with over $1 trillion changing hands every day. It is the main event.

The benefits of forex over currency futures trading are considerable. The dissimilarities between the two instruments range from philosophical realities such as the history of each, their target audience, and their relevance in the modern forex markets, to more tangible issues such as transactions fees, margin requirements, access to liquidity, ease of use and the technical and educational support offered by providers of each service. These differences are outlined below:

• More Volume = Better Liquidity. Incomparable liquidity is one of many advantages that forex markets hold over currency futures. Truth be told, this is old news. Any currency professional can tell you that cash has been king since the dawn of the modern currency markets in the early 1970's. The real news is that individual traders from every risk profile now have full access to the opportunities available in the forex markets.

• Forex markets offer tighter bid to offer spreads than currency futures markets. By inverting the futures price to compare it to cash, you can readily see that in the USD/CHF example above, inverting the futures dealing price of .5894 - .5897 results in a cash price of 1.6958 - 1.6966, 8 pips vs. the 5-pip spread available in the cash markets.

• Forex markets offer higher leverage and lower margin rates than those found in currency futures trading. When trading currency futures, traders have one margin rate for "day" trades and another for "overnight" positions. These margin rates can vary depending on transaction size.

• Forex markets utilize easily understood and universally used terms and price quotes. Currency futures quotes are inversions of the cash price. For example, if the cash price for USD/CHF is 1.7100/1.7105, the futures equivalent is .5894/ .5897; a methodology followed only in the confines of futures trading.

• Currency futures prices have the added complication of including a forward forex component that takes into account a time factor, interest rates and the interest differentials between various currencies. The forex markets require no such adjustments, mathematical manipulation or consideration for the interest rate component of futures contracts.

In contrast, currency futures are a small part of a much larger market; one that has undergone historical changes over the last decade.

• Currency futures contracts (called IMM contracts or international monetary market futures) were created at the Chicago Mercantile Exchange in 1972.

 

• These contracts were created for the market professionals, who at that time, accounted for 99% of the volume generated in the currency markets.

 

• While some intrepid individuals did speculate in currency futures, highly trained specialists dominated the pits.

 

• Rather than becoming a hub for global currency transactions, currency futures became more of a sideshow (relative to the cash markets) for hedgers and arbitragers on the prowl for small, momentary anomalies between cash and futures currency prices.

 

• In what appears to be a permanent rather than cyclical change, fewer and fewer of these arbitrage windows are opening these days. And, when they do, they are immediately slammed shut by a swarm of professional dealers.

These changes have significantly reduced the number of currency futures professionals, closed the window further on forex vs. futures arbitrage opportunities and so far, have paved the way to more orderly markets. And while a more level playing field is poison to the P&L of a currency futures trader, it's been the pathway out of the maze for individuals trading in the forex markets.