What is the Forex Market?
The Forex market is the largest tradable market in the world and grosses over US$3.2 trillion worth of trades every single day, higher than all of the worlds stock markets combined. Despite being the largest financial market in the world, it is relatively unfamiliar terrain to retail traders. Until the creation of internet trading, FX was primarily the preserve of large financial institutions, multinational corporations and secretive hedge funds. However times have changed and retail investors are finding it increasingly easier to involve themselves and benefit from the plethora of opportunities.
Unlike the trading of stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members’ trade with each other based upon credit agreements. Essentially, business in the largest, most liquid market in the world depends on honesty and interaction between its users. Although this may concern some investors it works very well because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the forex market.
It is this self regulation that makes things very interesting within the FX market place. No regulation means, no restrictions. No restrictions means no insider trading rules, so if you are lucky enough to be presented with information from an inside source you are free to profit from it.
Before we start assuming that the market is a law unto itself, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope makes the currency market the most accessible market in the world.
With limited restrictions the market can be traded up or down, long or short. What is actually traded is the potential movement of a currency pair, so if we believe that Sterling, £, will rise against the US$, a long GBP/USD position is placed. For example, is the price is currently $1.58, in this instance the £ is the base, or control, currency and 1 of these will purchase $1.58. FX trading is always based on pips; a pip is the smallest denomination given to currency, effectively the 4th decimal place or 1/1000th. For instance the GBP/USD would be presented as $1.5805 and a move to $1.5815 should be profitable, subject to the width of the spread. The only exception to that rule is the Japanese yen. Because the Japanese yen has not been re-valued since World War II, the quotation is only taken out to two decimal points (i.e. to 1/100th of yen).