BREAKING DOWN ‘Forex – FX’
There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week, except for holidays, and currencies are traded worldwide.
The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market.
The Basics of Forex
The term foreign exchange is usually abbreviated as «forex» and occasionally as «FX.»
The global foreign exchange market is the largest and the most liquid financial market in the world, with average daily volumes in the trillions of dollars. Forex transactions take place on either a spot or a forward basis. There is no centralized market for forex transactions, which are executed over the counter and around the clock. The largest foreign exchange markets are located in major financial centers like London, New York, Singapore, Tokyo, Frankfurt, Hong Kong and Sydney.
Just How Large Is the Forex Market?
The forex market is unique for several reasons, mainly because of its size. Trading volume is generally very large. As an example, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, according to the Bank for International Settlements, which is owned by 60 central banks, and is used to work in monetary and financial responsibility.
The world’s largest trading centers can be found in London, New York, Singapore and Tokyo.
How to Trade in the Forex Market
The market is open 24 hours a day, five days a week across major financial centers across the globe. This means that you can buy or sell currencies at any time during the day.
The foreign exchange market isn’t exactly a one-stop shop. There are a whole variety of different avenues that an investor can go through in order to execute forex trades. You can go through different dealers or through different financial centers, which use a host of electronic networks.
From a historic standpoint, foreign exchange was once a concept for governments, large companies and hedge funds. But in today’s world, trading currencies is as easy as a click of a mouse — accessibility is not an issue, which means anyone can do it. In fact, many investment firms offer the chance for individuals to open accounts and to trade currencies however and whenever they choose.
When trading in the forex market, you’re buying or selling the currency of a particular country. But there’s no physical exchange of money from one party to another. That’s what happens at a foreign exchange kiosk — think of a tourist visiting Times Square in New York City from Japan. He may be converting his (physical) yen to actual U.S. dollar cash (and may be charged a commission fee to do so) so he can spend his money while he’s traveling. But in the world of electronic markets, traders are usually taking a position in a specific currency, with the hope that there will be some upward movement and strength in the currency they’re buying (or weakness if they’re selling) so they can make a profit.
A spot deal is for immediate delivery, which is defined as two business days for most currency pairs. The major exception is the purchase or sale of U.S. dollars vs. Canadian dollars, which is settled in one business day. The business day calculation excludes Saturdays, Sundays and legal holidays in either currency of the traded pair. During the Christmas and Easter season, some spot trades can take as long as six days to settle. Funds are exchanged on the settlement date, not the transaction date.
The U.S. dollar is the most actively traded currency. The euro is the most actively traded counter currency, followed by the Japanese yen, British pound and Swiss franc.
Market moves are driven by a combination of speculation, especially in the short term; economic strength and growth; and interest rate differentials.
Any forex transaction that settles for a date later than spot is considered a «forward.» The price is calculated by adjusting the spot rate to account for the difference in interest rates between the two currencies. The amount of the adjustment is called «forward points.» The forward points reflect only the interest rate differential between two markets. They are not a forecast of how the spot market will trade at a date in the future.
A forward is a tailor-made contract: it can be for any amount of money and can settle on any date that’s not a weekend or holiday. Transactions with maturities longer than a year are relatively unusual, but are possible. As in a spot transaction, funds are exchanged on the settlement date.
A «future» is similar to a forward in that it’s for a date longer than spot, and the price has the same basis. Unlike a forward, it’s traded on an exchange, and can only be executed for specified amounts and dates. With a futures contract, the buyer pays a portion of the value of the contract up front. That value is marked-to-market daily, and the buyer either pays or receives money based on the change in value. Futures are most commonly used by speculators, and the contracts are usually closed out before maturity.
Differences Between Forex and Other Markets
There are some major differences between the forex and other markets:
Fewer rules: This means investors aren’t held to as strict standards or regulations as those in the stock, futures or options markets. There are no clearing houses and no central bodies that oversee the forex market.
Fees and commissions: Since trades don’t take place on a traditional exchange, you won’t find the same fees or commissions that you would on another market.
Full access: There’s no cut-off as to when you can and cannot trade. Because the market is open 24 hours a day, you can trade at any time of day.
Ease: Because it’s such a liquid market, you can get in and out whenever you want and you can buy as much currency as you can afford.