The Forex market (with its naming standing for foreign exchange) is a global market with the purpose of setting the exchange rates of any currency in the world, and due to this it is by far the most liquid and the largest in the world. But what do you need to consider if you’re willing to invest and trade on it?
Forex, it may seem easy but it’s not
As a concept it can appear a simple market, not involving knowledge of Ebitda, P/E ratio or other complex concept of the stock market, or the complex rules of option trading and so on. But it is actually a rather complex market as well, and knowing its aspect and rules is critical for wise and possibly sucessful investment.
Let’s cover the main parts of it.
When can I invest?
One of the most interesting and useful rules of Forex trading is that you can follow and invest almost.. always.
The market is infact open 24 hours a day except for some time on weekends, more precisely from 5 p.m. EST on Sunday until 4 p.m. EST on Friday, non stop.
The reason behind this great advantage (that doesn’t allow the needed breaks from trading, though) is due to its decentralized nature, it is managed by a huge network of digital infrastructure rather than an institution; it allows to trade from various parts of the world, thus there is almost always at least one market open; and fortunately, we would say, since Currency is also needed for international trade, central banks and worldwide businesses to operate.
If we want to give sort of a timeline to the opening hours on each day, it starts with the Australian timezone, then Europe and then Americas each region with its trading session; markets are always ready for trading.
So if the market is always open, why we keep hearing “the U.S. Dollar closed at..” every day? Simply because that’s the market closure in New York, but doesn’t mean that trading actually stops.
Forex and leverage
Another important characteristic, exciting but risky in the same way, is the presence of the Forex trading leverage, a concept we will explain better in other articles, but it allows to trade in the market using more money than what you have in your account. How does it sound?
Now imagine that the ratio that many brokers are offering is 50:1; that is, if you are willing to invest with 1,000 $ from your money, you can actually trade with a sum of 50,000 $! Just hope you do it in the right direction, because obviously if you try this without lot of preparation and precaution (for example choosing a volatile currency or in a volatile period) it is a very high risk of losing your investment quite fast, even in few hours.
This said, we can be confident to say that Forex market is usually much less volatile that others, so with a good strategy and plan it can give great results also taking advantage of leverage. But just not at the start.. better to try limiting the leverage to a minimum or even none at first, and keep learning for a good period.
Ask and Bid
In the forex market, there is a spread between Ask (the buyers) and Bid (the sellers), and it is very important. Since the big traders are using some form of leverage and moving very big amount of money, even a single pip (the unit of measure of price movements per each currency) can mean a lot of cash; and the spread is always to be considered when we input our take profits or stop losses, in order to avoid that our order will pass by without being considered, especially in case of “Intraday” trading, that is used by some investors with very complex strategy to execute a lot of small and fast trading with the aim of obtaining small but many profits (and losses), and a balance at the end of the day. But the spread is much different according to the participant, there are in fact many difference according to who you are..
Given its importance, it is clear that individual investors and speculative traders are not the ones moving the biggest amounts, let’s discover who participates in the most liquid market in the world:
- Banks and Securities dealers: the big guys, huge volumes are exchanged by these institutions, amounting at more than 50% of all the transactions for the interbank trading. Interesting to note, due to the liquidity of the market and large amount of orders the spreads between Ask and Bid are almost at zero, there simply is no need to play with spreads here.
- Companies: obviously also multi-national companies are here, with their activity to ensure being able to pay for goods or services in foreign currency; less volumes, faster transaction than banks, but no less important for the economy worldwide.
- Investment firms: now we start to be in the speculative area, trading of specialists on behalf of big investors, rich people or funds that are relying on these companies for foreign securities
- Retail investors: here we are, smaller in size but many in numbers and growing; recently it is a very succesful market, given the advantages we discussed earlier, for individual investors that are using brokers or banks to operate their trading.
And more… there are actually many other participants on the Forex market, for example money-exchange companies are using it and keeping updated with all the currency pairs pricing they are offering to customers. All of the ones listed and others are contributing to the biggest financial market in the world.
In addition to all these rules and features, important to consider and read more about, we can consider the foreign exchange market a complex one also due to the fact that, even if you don’t have to undertand and consult the business budget and turnover documents as to invest on the stock of a Company, it can be highly affected by news, especially involving central banks, regulations, or even political decisions and general economic scenarios that can impact one or more countries.
It is thus very important to follow all these aspects to understand a possible trend, and not only rely on patterns analysis or “reading the charts” that anyway are an interesting part of the picture. We hope this can be useful for you, please let us know your thoughts and what else you would like us to cover in the next articles.