What Is Forex?
To be an effective Fx Ninja you need to know your opponent. So let’s take a look at what the Forex market is.
What is the Forex market?
Forex – The foreign exchange market or spot fx or retail Forex or currency market is a non-stop financial market where currencies of different nations are traded.
Some of the participants in this market include government, central banks, commercial and investment banks, hedge funds and massive multinational corporations. Some of the volume in the forex market is simply banks and corporations exchanging a foreign currency for another. However, traders who attempt to take advantage of small fluctuations in exchange rates can also participate in the Forex market.
Forex stands out from other markets for a number of reasons:
- 24-hour trading, 5 days a week.
- The ability to profit in rising or falling markets.
- The biggest financial market in the world.
- Leveraged trading with low margin requirements.
- Unlike stocks the market cannot be cornered.
Every day close to $5 Trillion is traded through the Forex market. Even if you take all the daily volume traded on the U.S. stock, bond and equity markets and add it together it does not come close to matching the enormity of the Forex market.
What does this mean for you?
It means that, if you patiently complete your Fx Ninja training, you can become a trader in the Forex market. If, however, you want to be Rambo and go in guns blazing, the market will beat you down.
What do you trade in Forex?
In the stock market you trade stocks. In the commodities market you trade commodities and in the Forex market you trade Forexies. Kidding!
Just a little ninja humour there. In the Forex market you trade currencies.
In the next lesson we will discuss this a little more.
What is the Spot FX market?
Spot FX is just another name for Forex, it is not a different market. Spot market simply means a market that deals on the current price of a financial instrument, unlike markets such as futures which are traded differently. In the Forex market, trades are taken based on current prices, therefore it is a spot market.
A Little More on Forex
Ok newbie ninja, lets quickly go through a few other facts about the Forex market. You don’t need to know this stuff to be a successful Forex trader but, if you’re going to trade this market, you might as well know a few cool facts about it.
Back in 2007, the reported daily average turnover of the Forex market was reported to be over US$3.2 trillion by the Bank for International Settlements. Between 2007 and 2008, it was reported that the market grew an additional 41%, taking it to a massive US$4.5 trillion daily.
The average daily turnover for 2007 was:
- $1.005 trillion in spot transactions
- $362 billion in outright forwards
- $1.714 trillion in foreign exchange swaps
Foreign exchange swaps account for a slim majority of the average daily turnover. They are mostly put through by institutions to fund their foreign exchange balances. Spot transactions account for the rest of the average daily turnover. They are spot positions taken by anybody from banks to Fx Ninjas.
Why isn’t Forex as popular as the Stock Market?
Even though Forex has been around for a long time it wasn’t until about 1996 that private individuals could trade it. Previously, It was only open to the very rich and was mainly traded by institutions, such as banks and hedge funds.
By 1998, the internet was increasing in popularity. This led to many brokers opening up shop online thus allowing smaller traders access to the Forex market.
So Forex is a relatively new market to smaller traders, and while it’s growing very fast, it is not as well known as the stock market. However, the Forex market has many advantages over the stock market.
Where Is Forex Located?
You need to know where it is to kick its butt right Ninja?
You probably already know that the physical location of the U.S. stock market is New York, and the Futures market is Chicago.
However, in Forex there is no central location. Forex is not dealt across the floor like the stock market on Wall Street, it is traded via the internet. Trading is conducted between traders 24 hours per day through electronic communication networks (ECNs), in various markets around the world. Since the Forex market is traded through ECNs, it does not need a physical location.
You may sometimes hear London referred to as the global center of the foreign exchange market. This is because trading in London accounts for close to 35% of all trading. This is more than double the 17% New York trading accounts for.
So, even though Forex has no physical location the global center of Forex is definitely London.
What are the Open and Close Times?
Arguably the best thing about the Forex market is that it’s open 24 hours a day for 5 days a week.
n the stock market, the New York stock exchange (Wall Street) has an open and close time. The fact that Forex is traded through ECNs, rather than a physical exchange (Wall Street), means that it doesn’t have to close. Thanks to the different time zones around the world, there is always a country open for business.
The market opens on Sunday at 5pm U.S. EST in Sydney and moves on to Tokyo, Frankfurt, London, New York and back to Sydney and through again until it closes in New York on Friday at 4pm EST.
When you start trading make sure to check out the free Forex4Noobs Market Clock for accurate open/close times.
What’s an ECN?
An electronic communication network (ECN) is the term used to describes the computer system that facilitates trading of financial products outside of physical exchanges, such as Wall Street. Forex is traded through an ECN. ECNs first started being used in 1998 when the SEC (Securities and Exchange Commission) authorized their creation.
ECNs are what allow small traders to trade from home 24 hours per day.
