What is Forex market?

Kopito Academy
23 Feb 2023

What is Forex Market?

 

Introduction

 

Regarding the Forex market, it should be said that today many successful traders in the world are active in different financial markets at the same time, each financial market according to the various financial instruments and contracts they offer to their audiences, offers special attractions to traders who have entered the market with the aim of making a profit or hedging risk.

The word Forex is composed of two words, Foreign Exchange meaning the Foreign Exchange Market is formed. In this market, traders enter into buy or sell transactions in order to profit from currency fluctuations against each other, of course, another group of traders, mostly in the category of institutional traders, enter this market not only to profit from market volatility, but also because of the hedging of their foreign exchange risks.

It should be noted that the Forex market does not have any physical place and operates as a decentralized market, and traders from around the world can register their trading in one of the Forex market brokers.

Forex market activity hours

Forex market activity hours

As mentioned earlier, the Forex market is a decentralized market that connects traders around the world through an interbank network (ECN), The market operates 24 hours a day from Monday to Friday and is closed only on Saturdays and Sundays. There are 5 main sessions in this market based on major foreign exchange centers and different time zones, respectively: Sydney, Japan, Frankfurt, London and New York. Of course, other small and minor markets from all over the world are operating in parallel with the main sessions. The majority of daily forex trading volumes take place at times overlapping major markets such as Japan - London or London - New York.

The 24-hour Forex market is one of the main advantages of this market compared to other markets such as stocks, as traders can register their trading orders on the market at any time of the day.

Advantages of Forex Trading

What is advantages in Forex Market?

The first advantage of the Forex market that can be pointed out is the two-way of this market. Since contracts in the Forex market are CFDs meaning Contract for Deference or rate difference, Forex market traders can make profit from both the upward and downward moves of the market, Thus, if the trader analysis is on the rise of the price of a financial product, A certain number of contracts (LOT) buys the product and at a time when it feels the upside is coming to an end, it settles the purchased contracts and receives the difference in the entry and exit rate to the transaction as the profit of the transaction, in the second case, if the trader's analysis indicates that the price of a financial product is downward, the trader borrows a certain number of contracts from his broker and sells it on the market due to the possibility of borrowing a certain number of contracts and when the trader feels the downside is coming to an end, he buys the equivalent of sold contracts in the market at a lower price and settles with his broker, in this case, the difference in the entry and exit rates to the transaction is received as the profit of the transaction.

We will talk about CFDs and borrowing sales in another article.

What is leverage in Forex and what does it mean?

The second advantage of forex trading is the possibility of using leverage, In the Forex market, you have the opportunity to enter a transaction by paying only part of the contract amount (as margin), for example if you want to open buy order with a volume of 1 lot (100,000) on the Euro currency versus the US dollar (EUR-USD), this contract will be worth $ 110,000 at the current equality rate, but if your broker offers leverage 1:100 means 100 times of the inventory, to enter into this transaction you only need $1,100 as a trade margin. It should be noted that leveraged credit increases your profit potential as it can will also increase your loss potential, considering that high trading volume in market volatility can make big changes to your account.

It should be noted that leveraged credit varies in different brokerages that can be from 1:30 to 1:2000. In some countries, such as European countries the standard credit can be provided at 1:30, and if you request an increase in leveraged credit, you must submit the documents requested by the broker and if approved, you can increase your credit by up to 1:100.

Using demo account in Forex Maket

The third advantage of the Forex market is the use of a demo account. Trading in the financial markets is one of the jobs that you will initially suffer losses to learn, in the Forex market you have the possibility to make the initial losses of your strategy in the demo account and execute it in the real account after ensuring the profitability of the strategy.

Another advantage of the Forex market is the high speed of order registration. In more traditional markets such as the stock market, due to the lower depth of market liquidity to execute your buy or sell order, you should be in the buy or sell queues but in the Forex market as mentioned above, due to the high volume of daily liquidity, your trades will be executed in a fraction of a second in the market.

Forex Market Tradable Products

What is Forex Market Tradable Products?

The main financial products tradable in the Forex market are currency pair trading, but over the past years, with the advancement of technology and the topic of financial services, Forex brokerages have also offered other financial products to their clients in the form of CFDs. These include energy products (oil and gas), precious metals (gold and silver), corporate stocks, stock market indices (Dow Jones, Nasdaq) and Cryptocurrency.

The effect of daily news on forex

The effect of daily news on forex

Since Forex is a global market with high trading volume, important economic news and events have a significant impact on the daily fluctuations of this market. For this reason, special news sites such as FoexFactory.com, TradingEconomics.com, etc. investigate the events of the world market and the changes in the economic indicators of the countries and publish these reports on their sites.

Currency pairs in the forex market

Currency pairs are generally divided into three categories:

1- Major currency pairs

These currency pairs have allocated for more than 70% of ma

rket transactions. These currency pairs usually have low fees and high liquidity. The currencies in this category are related to the powerful and leading economies of the world, such as EUR/USD

2- Minor currency pairs

In terms of transaction value and reputation, they are in a lower category than the main symbols, but they have higher fees than the main currencies. The liquidity of these currency pairs is almost similar to the first category, and the price stability of these currency pairs is less, for example, EUR/GBP.

3- Cross or EXOTIC currency pairs

Currency pairs that include a main currency along with one of the emerging economic currencies are called. These symbols have allocated the lowest amount of forex transactions. In these currency pairs, the fees are very high and the price fluctuations are extreme. For this reason, they are not very popular among traders, such as USD/ZAR

Classification of brokers

Regulatory Bodies of Brokerages

There are different types of forex brokers. Choosing a suitable broker has a significant impact on profit and loss and even trading style. Generally, brokers are divided into two general categories:

Dealing Desk

These types of brokers are also called market makers. These companies are not connected to the central trading core or ECN network, and the buying and selling prices are determined based on the market margin and by the broker itself. In such brokerages, your trading party is your broker, and the profit of your transaction will be from the broker's side and your loss will be for the broker, of course, this does not mean that these types of brokerages are not reliable, but if in a large market operator brokerage with the volume of transactions and Trade high liquidity, high activity history and good global reputation, you have greatly reduced the risk related to brokerage in your investment.

Non Dealing Desk

In this type of trading account where the fees are usually not fixed, you connect to the global system of supply and demand. Such accounts are divided into two categories:

1-2 STP (Straight Through Processing)

A mode where customers' purchase and sale orders are executed without wasting any time connecting to the central system and exactly based on the entered details and global market prices.

2-2 STP+ECN

The broker receives all trading offers according to the STP procedure, but with the difference that he offers the customer the best price to execute the order based on the demand in the market.

In both cases you have access to the depth of the global market. Usually, the most reliable brokerage companies that are approved by the best and largest regulatory bodies are in this category.

Regulatory bodies of brokerages

Regulatory Bodies of Brokerages

Forex brokers act as intermediaries between buyers and sellers through the interbank network. Various supervisory (regulatory) institutions around the world supervise the activity of this brokerage to carry out currency exchanges. The main task of these institutions is to monitor and establish rules for brokerages to prevent various violations. These institutions themselves are usually under the supervision of the economic institutions of the countries of origin. Among these regulatory bodies, Cysec (Cyprus Securities and Exchange Authority) and FCA (Financial Conduct Authority) can be mentioned.

Conclusion

In this article, we tried to get you an overview of the Forex market but keep in mind that this market like any other business, requires training and gaining experience and operating in it without sufficient knowledge and experience can lead to losses or even loss of total fund but with enough experience and skill, good and reasonable profits can be make money from this market.