What Is Forex?

In forex trading Whether you’re an individual trader or a financial or investment professional, the foreign exchange (forex) market, also known as the currency or foreign currency market, is where the money is literally. Forex trading amounts to approximately $5 trillion (yes trillion, not billion) per day. By comparison, the approximately $700 billion a day bond market and $200 billion a day in stock trading worldwide appear relatively small in size. The total daily value of all the stock trading in the world equals just about one hour’s worth of trading in the forex market every day.
There are several distinct groups of participants in the forex market. The largest group of forex traders, in terms of the total dollar value of trading that they account for, is comprised of commercial and investment banks. Banks conduct a large amount of currency trading on behalf of their customers who are involved in international operations. They also serve as market makers in forex trading and trade heavily in their own accounts. (If a banker ever cautions you against forex trading, you might want to ask them why, if forex is such a bad investment, their bank invests such huge sums in the forex market. Just a thought.

If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can’t pay euros to see the pyramids because it’s not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case, the Egyptian pound, at the current exchange rate.
The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. Governments, through their central banks, are also major players in the forex market. The central bank of a nation will often adopt large positions of buying or selling its own currency in an attempt to control the currency’s relative value in order to combat inflation or to improve the country’s balance of trade. Central bank interventions in the forex market are similar to policy-driven interventions in the bond market.

Large companies like us, that operate internationally are also substantially involved in forex trading, trading up to  billions of dollars annually. Corporations use the forex market to hedge their primary business operations in foreign countries. For example, if a U.S.-based company is doing a significant amount of business in Singapore, requiring it to conduct large business transactions in Singapore dollars, then it might hedge against a decline in the relative value of the Singapore dollar by selling the currency pair Sgd/Usd (Singapore dollar vs. US dollar). Last, but certainly not least, are individual forex traders, speculators who trade the forex market seeking trading profits. This group includes a disparate cast of characters, from professional investment fund managers to individual small investors, who come to the market with widely varying levels of skill, knowledge, and resources.
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney – across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.

Spot Market and the Forwards and Futures Markets
There are actually three ways that institutions, corporations, and individuals trade forex: the spot market, the forwards market, and the futures market. The forex trading in the spot market always has been the largest market because it is the “underlying” real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading and numerous forex brokers, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.

Our best trading strategy- Gap Trading
A gap occurs when where no trading activity has taken place. This happens when an asset’s price moves sharply high or low with nothing in between, implying the market has opened at a different price to its previous close. If you’re a gap trader, you are likely a day trader that watches these price gaps from a previous day and seek opportunities between this and the opening range of trading for the next day. An opening range that rises above the previous day’s close is a ‘gap’ that usually signifies going long, while an opening range that is below the previous day’s close signifies an opportunity to go short.

What are the forwards and futures markets? Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement. In the forwards market, contracts are bought and sold over-the-counter (OTC) between two parties, who determine the terms of the agreement between themselves.
In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange.
In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement. Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. Note that you’ll see the terms: FX, forex, foreign-exchange market, and currency market. These terms are synonymous and all refer to the forex market.
Arbitrage is a transaction or a series of transactions in which you generate profit without taking any risk. An example of this would be spotting an opportunity in two equivalent assets where one is priced higher than the other and taking advantage of buying the lower priced one while it is still undervalued. There are few arbitrage opportunities because many traders may also be on the lookout and so they are often found quickly. In this case, the arbitrage edge disappears quickly as more traders flood the market to try and trade the opportunity.

Advantages of Forex Trading – Leverage, Liquidity, and Volatility
One of the major attractions of forex trading is the unparalleled leverage that is available to forex traders. Leverage is the ability to hold a market position with only a fractional amount of the market value of the instrument being traded. This fractional amount is known as “margin”. Leverage is expressed as a ratio that shows the amount of margin required by a broker to hold a position in the market. For example, 50:1 leverage means that a trader only needs to put up 2% of a trade’s total value to initiate a trade. Some brokers offer up to 1000:1 leverage. High amounts of leverage mean that forex traders can utilize a very small amount of investment capital to realize sizeable gains. For example, by putting only around $10 in margin money, trading micro-lots with 500:1 leverage, a trader can realize a profit of approximately $20 (double his investment) on just a 20-pip change in the exchange rate. Given that many currency pairs often have a daily trading range of 100 pips or more, it’s easy to see how traders can realize substantial gains from very small market movements, using minimal amounts of trading capital, thanks to leverage. However, traders have to keep in mind that just as leverage magnifies profits, it also magnifies losses. So a trader might only commit $10 of his total trading capital to initiate a trade, but end up realizing a loss substantially greater than $10.

Liquidity
The extremely high volume of trading that occurs in the forex market each trading day makes for correspondingly high levels of liquidity. High liquidity makes for low bid-ask spreads and allows traders to easily enter and exit trades throughout the trading day. The bid-ask spread on major currency pairs, such as Gbp/Usd, are typically much lower than the bid-ask spread on many stocks, which minimizes transaction costs for traders. For large institutional traders, such as banks, high liquidity enables them to trade large positions without causing large fluctuations in price that typically occur in markets with low liquidity. Again, that makes for lower total trading costs and thus larger net profits or smaller net losses. Higher liquidity is also considered by many traders to make markets more likely to trade in long-term trends that can more easily be analyzed with the use of charting and technical analysis.

Volatility

As previously noted, many of the most widely traded currency pairs often have a daily trading range of up to 100 pips or more. Combined with high leverage, this daily volatility makes for significant opportunities to realize profits simply within the range of price fluctuations that occur within a normal trading day. The advantage of volatility is enhanced by the fact in forex trading, it is just as easy to sell short as it is to buy long. There are no restrictions on short selling such as those that exist in stock markets. A wide daily trading range, with equal opportunities to profit from both buying and selling, makes the forex market very attractive to speculators.

Forex markets chart

How to Get Started with Forex Trading

Trading forex is similar to equity and crypto trading. Here are some steps to get yourself started on the forex trading journey.

• Set up an account: You will need a forex trading account at a brokerage to get started with forex trading. Aspen Financial Management does not charge commissions. Instead, we make money through spreads (also known as pips) between the buying and selling prices.
• Fund your account: The final step will be funding your wallet by transferring Bitcoin or any other cryptocurrency of your choice to it. Trading begins immediately deposit is confirmed and payments are made daily to your trading accounts. Cryptocurrency deposits are made and confirmed within 24 hours.