Education / Forex market overview


Currency, in common words, is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. The foreign exchange market, where investors often trade currency, is one of the most heavily traded markets in the world.

The foreign exchange (currency or Forex or FX) market exists wherever one currency is traded for another. It includes trading between large commercial banks, central banks, currency speculators, firms that conduct foreign trade transactions, governments, and other financial markets and institutions, private persons. Retail traders (individuals) are currently a small part of this market and may only participate indirectly through brokers or banks.

In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand. The exchange rate is a price - the number of units of one currency that must be surrendered in order to acquire one unit of another nation's currency.

The foreign exchange market is by far the largest and most liquid market in the world. The breadth, depth and liquidity of it are truly impressive. Individual trades of $200 million to $500 million are not uncommon. Quoted prices change as often as 20 times a minute. The world's most active exchange rates can change up to 18, 000 times during a single day. Large trades can be made, yet econometric studies indicate that price tend to move in relatively small increments, a sign of a smoothly functioning and liquid market.

Exchange markets work all the time. The calendar working twenty-four-hour period is started in the Far East, in New Zealand (Wellington), passing the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Main, London, then finishing the day in New York and Los Angeles. The count of time zones begins from the zero meridian in Greenwich near London, and the time itself is called Greenwich Mean Time (GMT).

The working day of exchange brokers of Western commercial banks starts, as a rule, at 7:30 am by local time. At 8:00 am the dealers close deals. The morning hours are usually devoted to short analyses of events on the international exchange markets at the moment. The dealers tend to use economic and technical analyses of the situation in the market, read analytical articles in newspapers, then exchange points of view and the latest rumors with each other and with dealers from other commercial banks. In such a way a picture of possible behavior of the exchange rate on the coming day is outlined, with variants of possible events.

By 8:00 am the market enters the operations of the international exchange market, giving a new and powerful impulse to the movement of the exchange rate. Various territorial markets can be given the following characteristics of an average typical activity during a 24 hour day.

The Forex market, unlike a stock market, is divided into levels of access to the price. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are very sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the Forex market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail Forex market makers.