The currency market, also known as FX or forex market, is the largest and most traded financial market in the world.
The FX market has grown to reach a daily trading volume of more than 5 billion dollars, which is 200 times more than the New York Stock Exchange.
Traditionally, the main players in the FX market were the large central banks, multinationals and large financial institutions.
Although these organizations remain prominent players in the market, the development of online brokers and technology make it possible for individual retail operators to access it and operate on equal terms with larger ones.
Advantages of trading in the forex market
The FX market is very attractive to retail operators due to its extreme liquidity. A liquid market implies that there is a huge number of buyers and sellers, which results in a rapid execution of operations – both buying and selling – at any time during its opening hours.
2. Continuous operation
The FX market is open 24 hours a day for 5 days per week, which means that we can open and close trades at any time, unlike in other markets such as raw materials and securities. The largest volume of trading usually occurs as different world markets open throughout the day, starting with Sydney, followed by Tokyo, London and ending in New York.
Due to the high level of liquidity of the forex market, most brokers offer a higher leverage than other markets. We will deal with this in more detail later. The basic concept is that an operator only needs a small percentage of the total price of the position. For example, if we have a leverage of 200: 1 and we have $ 500 to invest, our position would be $ 100,000.
Therefore, the slightest fluctuation in the price of a currency will have a considerable impact that can lead to higher profits with a small investment. However, leverage also works in reverse, and can multiply your losses.
4. Low input level
The high level of leverage of this market allows us to open accounts with a broker from just $ 100. This entry level is much lower than that of other types of investments.
5. Low transaction cost
Forex market brokers derive their benefits mainly from the difference between the purchase price and the sale price. It is what is called differential and, due to the high trading volumes of this market, it is a fairly small commission compared to those charged by traditional stock brokers, for example.
6. Market without manipulation
It is impossible for a great name to monopolize or manipulate the FX market due to its size. Unlike other smaller markets in which a large institution can influence prices by placing a large order, the FX market is so large that this would not have a significant impact. What often causes the big movements in this market are usually the decisions of governments, their policies and reports, as well as other world news.
Participation in the forex market
Many of us have already participated in the FX market before if we have traveled to a country with a different currency than ours. We have all seen those exchange houses where the different quotes are published on a screen.
For example, suppose we go on vacation from the United Kingdom to the United States and we see that the exchange rate they offer is 1 pound for every $ 1.50. That means that each dollar equals approximately 67 pence.
We decided to exchange 1000 pounds for 1500 dollars.
Suppose now that we do not spend the 1500 dollars and return to the United Kingdom with 500 dollars a week later. The exchange rate has varied, and now 1 pound equals 1 dollar with 25 cents. That means that each dollar is worth approximately 80 pence.
Therefore, the dollar has appreciated against the pound during that time. Now we change our 500 dollars to pounds at a rate of 1 dollar every 80 pence and receive 400 pounds. We get more pounds for our dollars.
As a rebound, we have just made profits in the FX market.
What can be operated with?
The currency of a country is a direct reflection of what the market thinks about the current and future situation of its economy. A recession or stagnant economy will result in a weak currency, while a flourishing and growing economy will generate a strong currency. Therefore, we are speculating on the strength or weakness of one economy or country compared to another.
Major and minor currencies
When trading in the FX market, currencies are abbreviated using three-letter symbols. For example, the euro is EUR; the dollar, USD; the Japanese yen, JPY; the pound sterling, GBP, etc. Currencies are usually divided into two categories: major currencies and minor currencies.
As you can imagine, the main ones correspond to the currency of large economies such as the US. USA, the United Kingdom, the euro zone, Canada, Australia, Switzerland and New Zealand.
A notable absence is the Chinese yuan, since the government of that country restricts the negotiation with its currency. The main currencies are by far the most traded and represent around 90% of the FX market.
Minor or exotic currencies receive this name because they correspond to less important or emerging economies such as the Hong Kong dollar, the Mexican peso, the Swedish krona or the Hungarian forint, among others. They are traded in smaller amounts compared to the main currencies and, frequently, the negotiation cost is much higher due to their lack of liquidity.