Currently, the Forex currency market is the largest in the world
with a trading volume of around $3.21 trillion being exchanged on a
daily basis. To give you a sense of scale, the New York Stock Exchange
(NYSE) turns over an estimated $87 billion daily. That means the Forex
currency market volume is 36 times that of the NYSE.
This market
is not on an actual exchange like the NYSE, NASDAQ or CME. It is an
over-the-counter or OTC financial market which means the trade is made
directly between two parties.
One of the main functions of the
Forex currency market is to facilitate international trade and foreign
investment. Basically to make currencies fluid across countries and
businesses so international business is streamlined.
The other
main function of this market is for speculators, traders and investors
to make a profit by taking advantage of exchange rate fluctuations and
volatility.
The large trading volume makes this market one of the
least able to be manipulated by a single party like in most other
markets. One trader with a large trading fund can't pump money in and
out of a currency pair to manipulate the price like they would be able
to in a less liquid market like the equities market. This is what makes
it one of the most attractive markets to trade in for many people.
The
only exception to this are central banks. They can move the market
through announcements about rate adjustments as well as actual rate
adjustments. But because they have no profit motive, these moves aren't
seen as manipulative ploys to make a profit for themselves.
Major Market Players
There
are many different types of market players that trade and effect this
market. They range from government institutions to the day trader
sitting in his home office.
Central banks probably have the most
influence on the Forex currency market. One of the major mandates of
national central banks is to keep their home currency stable. That means
to keep it from inflating or deflating too fast. It also needs to keep
the currency in a place that will grow their economy without these
detrimental effects. In an effort to do that, they will adjust the money
supply and adjust interest rates to manage their economy and home
currency.
Invesment banks, hedge funds and other institutions who
trade speculatively are in another set of market players. The Forex
currency trading divisions in the major Wall Street investment banks
make a very significant percentage of the banks quarterly earnings. In
addition, there are many hedge funds who make currency trading a
significant portion of their trading portfolio.
Multi-national
corporations is in another set of major players in this market. Many
primarily do not do it speculatively just for a profit. They do it as a
risk management effort for their foreign investments and international
trade. Some do it speculatively as a side business, but many do not.
Day
traders have also in recent years risen to be players in this market.
With the technological advances in computers and the internet, day
trading in the Forex currency market has become very popular to many
investors. Most experts now say that the majority of day traders that
came in the early hype of this market has not been filtered out with
mostly compentent traders remaining.
Risks and Rewards of Forex Currency Trading
Currency
trading has become a very popular mode of trading financial markets for
many traders and investors. The main reason for this attraction is that
they can trade on margin. Trading on margin is basically using money
borrowed from the Forex broker to make trades.
Of course the
broker requires the trader to put down a minimum deposit, but in the
Forex currency market, you can leverage a small amount of your own money
to trade a large sum of money. For example, many Forex brokers have a
leverage ratio of 200:1. That means for every $1 you put in, you can
trade up to $200 of the broker's money. For a deposit of $5,000, a
currency trader can trade up to $1 million. That is how a small investor
can make a lot of money on relatively small fluctuations in the Forex
currency market.
Equally, the potential rewards are offset by the
potential risks involved. Just like a very small fluctuation going up
can make you great profits, so can a small fluctuation going down can
bankrupt a small trader.
Any traders interested in trading this market should first practice on a Forex demo account
to practice your trading skills, test your trading system and evaluate
your Forex broker. Trading in this market is not a game and it is not
easy. It's highly risky and anyone considering doing this themselves
need to realistically consider the risks involved.
Forex brokers are required to disclose the high level of risks involved, but they will not actively promote it. They generally place it in the fine print. Many also offer Forex managed account services if you want to trade this market but don't want to actively do it yourself.
Forex brokers are required to disclose the high level of risks involved, but they will not actively promote it. They generally place it in the fine print. Many also offer Forex managed account services if you want to trade this market but don't want to actively do it yourself.
