Forex Trading Basic

Forex Market Overview : size, Liquidity and Market Framework

Forex Trading Breakout Strategy

Forex Market Overview

To get a Forex Market Overview, we need to know how it was started. Forex is a loose acronym for Foreign Exchange Market that was originated in the 1970s, during the time when free currency exchange rates were introduced in the world. In Forex markets, market participants determine the price of one currency against the other purely from market forces stemming from supply and demand.

The main advantage of Forex trading is- there are no external controls in a Forex market and is perhaps it is the best example of a perfect market with free competition. Forex is considered as the biggest liquid financial market in the world, with market volumes ranging in 1-3 trillion US Dollars a day. The US Dollar, Euro, Japanese Yen, British Pound and Swiss Francs are the major currencies traded in Forex markets.

A Brief History of Forex Market

forex market overviewThe Forex markets that we are talking about today have evolved through some particular stages. At first there was the gold exchange period, which was followed by the Bretton Woods Agreement, and now we are here with the current setting. By the year 1974, the major industrialized nations’ currencies were floated more freely across those nations, coinciding with currency prices being quoted daily, it was only due to the advent of computers and technology in the 1980 to 1985 that the market reaches for cross-border Forex trading gained momentum extending through Asian, European and American time zones. Gradually, over the next few years, Forex transactions increased intensively to all the facets we see today in Forex markets worldwide.

Today advancement in computer and information technology has permitted the instantaneous transmission and receipt of currency prices across the world. These technological advances in computer networks are the primary reason behind the growth of Forex trading amongst ordinary investors.

How Does Forex Market Works?

To have a understanding of Forex market overview and learn how Forex markets work, one has to understand what exactly constitutes the Forex market, the institutional framework that drives this market, and importantly the process of currency price determination.

Forex market is no different from any other market where buyers and sellers meet to buy or sell a commodity for a specific price determined by the situation. The only difference that you may find in Forex market is that the currency constitutes the commodity, and the price at which it is exchanged conforms to the foreign exchange rate for that currency at that point in time.

Earning for Export-Import business of corporations, overseas remittances, and investment flows constitute the main sources of Forex. Individuals and entities who receive foreign currency are the primary market suppliers and they may sell foreign currency to licensed exchange dealers who in turn may pass it to other dealers in need of foreign exchange. The Central banks may sell foreign reserves to make market adjustments, and on the other side companies would need to buy this foreign exchange to make overseas payments. This creates a market for foreign exchange wherein a person may sell a currency today and probably emerge as a buyer the very next day.

There are several Forex Market Participants who are responsible for the market to work.

Forex Market Framework

There are 3 biggest Forex markets respectively in Tokyo, London and New York and they are networked with each other using all sorts of modern technology creating a seamless interface that transacts currency prices and deals with it almost instantaneously across the world. Forex market is driven by the institutional framework which is perhaps the key to the market itself and includes the following:

  • Central banks and central banks in different countries
  • Exchange markets and institutions that conduct Forex deals
  • Investment funds of individuals and corporations
  • Brokerages Firms and individual traders

While transacting with the different clients in exchange conversions, commercial banks of different countries accumulate a great part of Forex market needs which are often shared with other banks in interbank dealings setting. These banks (Such as: Union Bank of Switzerland, Swiss Bank Corporation, Deutesche Bank, Citibank etc.) with daily volume of transactions in billions of dollars that greatly influence the Forex markets. Central Banks such as Federal Reserve System of USA influence Forex markets by regulating the investment climate and making market interventions and so on.

Comparison of size and liquidity, and market time in Forex Market

It is not possible to quantify the exact amount of money which is traded in Forex markets worldwide since trading is not restricted to one single location. But several estimates have shown that the amount is between 1-3 trillion US Dollars a day. Well, this is certainly much more than the volume of stocks traded in all the major stock exchanges around the world and also far ahead than the gold and Forex reserves of the developed world. It also far exceeds the daily volume of foreign trade transactions between different countries. Therefore in terms of size of the market, number of participants of the market and liquidity situation, Forex markets is huge and offers the best opportunities to the investor.

There is superior liquidity in Forex markets allows traders to open and close positions in a matter of a few seconds or keep that position going on for several years or perhaps indefinitely which is not possible while trading stocks.

The bottom Line: Forex Market Overview

Remember that Forex trading offers you a worldwide market, instantaneously available to you on 24/5 basis from 00:00 GMT on Monday to 10.30 GMT on Friday covering all time zones using the superfast networked computers. When the sun sets in one trading center, it is dawn and the beginning of a trading day somewhere else in the world. On the contrary, stock market in any major country opens at 10 am local time and remains operative till 4p.m local time restricting the possibility of indulging in round the clock trading.

You can learn more on this from the article: Forex Trading Hours

While trading Forex, you always have control on your trading which is done strictly on your calling. Since Forex trading continues for 24 hours a day, there is no need to have a fixed schedule, and even if you set one, it’s purely your discretion based on your own trading strategy and of course to your liking.

READ MORE:

Chapter 1Introduction to Forex Trading
Lesson 1online Forex trading
Lesson 2Forex Market Overview
Lesson 3Forex Market Participants
Lesson 4Forex Trading Hours
Lesson 5Forex trading advantages

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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