Basic Concepts I: Introduction
The Foreign Exchange (often abbreviated as Forex or FX) market is the
largest market in the world with daily trading volume of over 1.9 $trillion in
September 2004*. With its high liquidity, low transaction cost and low entry
barrier, the 24-hour market has attracted investors around the world.
The following articles aim to introduce the key concepts in forex trading,
the terminologies and the characteristics of the FX market.
The articles first introduced the concept 'spread', which is the most
important transaction cost in forex trading, how the spread is presented in the
price quotes, what is the significance of it and what is the trick behind it.
As most of the retail customers choose to trade forex with margin account, the
articles then introduced what is margin trading, what is the significance of
margin, how to trade a margin account and how to choose the correct leverage
ratio.
In trading online forex, there are many types of orders that you can make
to facilitate your trades. The articles then explained the rationale behind
each type of orders, when and how to use each of them.
Being one of the most actively trading markets, the forex market is yet,
may not be the most well known market. The articles then gave a little
historical background and explained the nature of the forex market, and made an
overall comparison of various trading markets. It also discussed the pros and
cons of trading forex market and what are the recent trends.
Like any other trading instruments, traders should understand the terminologies
and the basis of the market before he/she starts real trading. The above
articles serve as an essential beginners' guide to the world of forex trading.
*According to the Triennial Central Bank Survey of the foreign exchange
market conducted by the Bank for International Settlements and published in
Sept 2004
Basic Concepts II: Nature of the Foreign Exchange Market
The Foreign Exchange Market is an over-the-counter (OTC) market, which
means that there is no central exchange and clearing house where orders are
matched. With different levels of access, currencies are traded in different
market makers:
The Inter-bank Market - Large commercial banks trade with each
other through the Electronic Brokerage System (EBS). Banks will make their
quotes available in this market only to those banks with which they trade. This
market is not directly accessible to retail traders.
The Online Market Maker - Retail traders can access the FX market
through online market makers that trade primarily out of the US and the UK.
These market makers typically have a relationship with several banks on EBS;
the larger the trading volume of the market maker, the more relationships it
likely has.
Market Hours
Forex is a market that trades actively as long as there are banks open in
one of the major financial centers of the world. This is effectively from the
beginning of Monday morning in Tokyo until the afternoon of Friday in New York.
In terms of GMT, the trading week occurs from Sunday night until Friday night, or
roughly 5 days, 24 hours per day.
Price Reporting Trading Volume
Unlike many other markets, there is no consolidated tape in Forex, and
trading prices and volume are not reported. It is, indeed, possible for trades
to occur simultaneously at different prices between different parties in the
market. Good pricing through a market maker depends on that market maker being
closely tied to the larger market. Pricing is usually relatively close between
market makers, however, and the main difference between Forex and other markets
is that there is no data on the volume that has been traded in any given time
frame or at any given price. Open interest and even volume on currency futures
can be used as a proxy, but they are by no means perfect.
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