FOREIGN EXCHANGE MARKET
The FOreign EXchange market or Forex or Fx is a huge financial market with daily volumes of 4-5 trillion US Dollars. The Forex market is a pure OTC (over-the-counter) market and that means that there is no centralized service. The participants in the Forex market are linked each other electronically via computers, fax and telephone and all together form an integrated currency exchange.
WHO ARE THE MAJOR PLAYERS IN THE FOREX MARKET?
There are many different participants in the Foreign Exchange market that include central banks, commercial banks, hedge funds, investment companies, commercial companies, retail investors etc.
The Interbank Market
The top Forex players are coming from the interbank market, where large banks and hedge funds can exchange currencies one against another. The top Interbank platforms for trading currencies are EBS (ICAP) along with Thomson Reuters.
Table: The Major Players in the Interbank Maket
Data: Euromoney, Survey 2014
THE RETAIL FOREX TRADING
Since the birth of Online Forex Trading 15 years ago more and more retail traders see the Forex Market as an opportunity for their Financial Freedom. Today there are tens of millions of active Forex traders from all over the world.
The Online Forex Trading
The online Forex trading requires the existence of a Forex Trading Platform, an Internet Connection and a Forex Broker.
◙ The Platform MetaTrader-4 is the clear industry standard among Forex Traders but there are many other platforms too such is the cTrader, the NinjaTraders, the TradeStation etc.
◙ The quality of the internet connection is important for Day-Traders, Robotic Traders and News-Traders
◙ The Online Forex Brokers are categorized by the method the use to execute their client orders. Therefore traders may choose among a Market Maker or an ECN/STP broker. Market makers execute orders via a dealing desk (DD) and actually create a market within a market. From the other hand, ECN/STP brokers are No-Dealing Desk (NDD) brokers and that means that they transfer their client orders directly to their liquidity providers (most commonly large banks).
WHY THE FOREX RATES FLUCTUATE?
The Forex rates fluctuate according to fundamental changes but also according to the general market psychology. The demand and the supply for a Forex currency is determined by the rate of growth of the underlying economy combined with many other factors and especially as concerns the level of interest rates.
MAJOR ECONOMIC INDICATORS FOR FOREX INVESTORS
When an important economic indicator is significantly changed then the Forex market reacts very dynamically. These are some of the most Important Economic Indicators capable of altering the value of Forex rates in a few minutes.
1. Interest Rates derision changes
2. Gross Domestic Product (GDP) changes
3. Nonfarm Payrolls / Unemployment
4. Inflation (CPI)
5. Trade balance.
6. Current Account
7. Foreign Purchases of Treasuries
8. Retail Sales
These are the times (EST) when Forex Investors should pay extra attention either to trade the news either to avoid them.
News Releases Time (EST)
1:45 – 5:30
European Union (Eurozone)
2:00 – 6:00
2:00 – 4:30
7:00 – 8:30
8:30 – 10:00
16:45 – 21:00
17:30 – 19:30
18:50 – 23:30
MAKING MONEY FROM TINY CURRENCY FLUCTUATIONS
Compared with the significant price fluctuations in the Equity Markets, the daily fluctuations in the Forex market may be considered as small. In most cases, currency pairs are moving maximum 1.0% in a daily basis. In other words the Forex Market is not very volatile in absolute numbers. What makes the Forex Market lucrative to traders around the world is the ability to leverage your trades combined with minimal spreads:
(1) High Capital Leverage (up to 500:1, gives the ability for huge profits even from tiny currency movements)
(2) Minimal Spreads (they are essential in order to be able to take advantage of the high capital leverage)
The Role of Liquidity
Liquidity in the Forex Market means tighter spreads and tighter spreads mean lower transaction cost, therefore more profits for traders. The more liquid a currency pair the greater the opportunity for making money even from tiny movements.
The most liquid Forex pairs are:
(1) EURUSD (European Currency against the US Dollar)
(2) GBPUSD (The British Sterling against the US Dollar)
(3) USDJPY (The US Dollar against the Japanese Yen)
(4) USDCHF (The US Dollar against the Swiss Franc)
The above 4 pairs are considered the most important assets among Forex traders. There are a few more pairs that are offered in very tight spreads:
(5) EURCHF (European Currency against the Swiss Franc)
(6) EURGBP (European Currency against the British Sterling)
(7) EURJPY (European Currency against the Japanese Yen)
(8) USDCAD (The US Dollar against the Canadian Dollar)
(9) AUDUSD (The Australian Dollar against the US Dollar)
(10) NZDUSD (The New Zeeland Dollar against the US Dollar)