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Foreign Exchange Markets: What does it mean?

It’s not certainly like the stock market you would have probably been to. Nor is it a kind of market where you would see goods being traded on the market floor. The point is, foreign exchange market is much more sophisticated, and you basically need to understand what it is all about before you actually do forex trading.

Firstly, it is important that you grasp the fact that unlike stock markets and other forms of market activity, a foreign exchange market does not work out of a particular building. Nor does the foreign exchange market confine itself to a particular country like the stock market for instance. What then is a foreign exchange market? Simply put, foreign exchange market is a market of interbank dealings facilitated by modern telecommunications network. The beauty of the forex market is that it can be traded at any time and from anywhere. All that you need is a computer with access to the Internet. Nowadays you could even trade forex on your cell phone. What happens is that, you use your cell phone to send information and that in turn would execute the trade from the software connected to your computer at home. Similarly, you could have real time forex signals delivered to your cell phone on a 24-x7 basis. And you could use these forex signals to trade from the comfort of your home.
If you were to trade in the stock markets, you would have to see the stock prices rise to book a profit. But that’s not the way a forex market operates. You could book a profit at any point in time provided you have a high quality forex trading system to follow. Perhaps the greatest thing about the forex market is that it can never ever be forced to stop.

Forex Markets: The participants.

The major participants of a foreign exchange market are central banks of various countries, commercial banks, investment funds, broker companies and of course you as an individual. Each of the participants are inter related in one-way or the other. For example, you can’t just buy a computer, get on to the Internet and access the forex markets directly. You need the help of a broker, who gives you the software, the margin, and the forex quotes so that you could start trading.

As we have now seen the role of the individual in the foreign exchange market, let us examine the role of the other major participants in the forex markets. The role of commercial banks is pivotal to forex markets, as they conduct the maximum volume of foreign exchange transactions. In fact commercial banks have a dual function. The banks could either use their funds to play the forex markets independently, or they could carry out conversion transactions for other forex clients who have their accounts in the bank. As for the Central banks of various countries, their participation is limited to market interventions that influence the exchange rate. Remember those exchange rates that flicker on your screen. They could change drastically if there were to be a Central bank intervention in the forex markets. Broker companies are just what they are meant to be. This is what you should know the most about. The broker companies bring together the buyer and seller of foreign currency and conduct the conversion dealing between the two and in the process claims a broker’s fee. Claiming a broker’s fee is alright but remember that per se there is no fee in the forex market calculated either as a percentage from the sum of transaction or as a sum agreed in advance. But you still end up paying brokerage to broker companies and that varies across broker companies. In the previous article we learnt that “exchange rates come from trading desks around the world”. But that still doesn’t answer the question “where exactly is the foreign exchange rate formed”? Since the broker companies have the information about the asked rates that is precisely the place where the real exchange rate is formed according to previously closed deals.

Forex Markets: How big is it?

Forex market is the largest and most profitable investment market in the world. Almost two trillion dollars of forex currency are traded in the markets every single day, and that excludes individual investors. Traditionally large multi-national corporations and very large financial institutions have contributed to this trading activity. It is only now that individuals are increasingly entering this market.

Forex Markets: The working hours.

The great thing about the forex market is that it is open 24 hours a day, five days a week, Monday to Friday. The funny thing is, when it is time for you to go to bed in North America, Japanese traders could very well be making transactions with their other Asian or European counterparts. Since foreign exchange markets work all the time, you need to know where exactly they start and end over a 24-hour period. In short you have to bear in mind that forex markets start in the Far East, Wellington in New Zealand, and then pass through the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt, and London before entering the United States market in New York and finally finishing the day in Los Angeles. So whether it is day or night, there are always market participants actively trading the forex market. Just like Las Vegas it is a market that never sleeps.

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