What is the forex market

The mercado de divisas, also known as foreign exchange, FX or currency market, is where currencies are traded. In other words, participants buy, sell or exchange currencies to hedge against international currency or to speculate on price movements and geopolitical events.

The size of the market is massive as the daily turnover rose to $7.5 trillion in April 2022 from $6.6 trillion in 2019. This makes it the most liquid market worldwide. It’s no wonder why forex is the biggest market in the world; it allows everyone, from central banks to small-scale investors, to potentially profit from currency changes relating to the global economy.

If you are looking for the best way to enter the global economy, you can do so by trading in the forex market.

How the forex market works

Most of the world’s currencies have a daily value or exchange rate, that is set by the forex market. The number of euros received when converting dollars to euros will depend on the current exchange rate. If let’s say, the price of imported French cheese increases overnight at the supermarket, the euro may have increased in value as compared to the US dollar.

Forex traders aim to profit from the ongoing changes in currency values. For instance, a trader may believe that the value of the British pound will increase. He or she will convert dollars into pounds. If the pound rises in value, the trader may reverse the trade and receive additional dollars in exchange for the pound.

Characteristics of the forex market

This global marketplace is an over-the-counter (OTC) with no central location. Instead, participants from all over the world trade electronically through computer networks between them in a more direct way. This more or less makes the market available to anyone with access to the internet.

Foreign exchange markets are seen to be more transparent than other mercados financieros. In OTC markets, where currencies are exchanged, disclosures are not required. Huge liquidity pools from institutional corporations are a regular phenomenon in the market.

It is also important to note that the forex market is a 24-hour marketplace that is open from Monday morning in Asia until Friday afternoon in New York. This suggests that when the trading day in the United States finishes, the forex market in Tokyo and Hong Kong begins again. As a result, the currency market could be extremely active at any moment, with price quotations changing regularly.

Today, trading is as easy as the click of a mouse and the forex market is accessible from everywhere around the globe. The majority of brokerages allow individuals to trade forex through their trading platforms.

Types of forex markets

Forex is typically traded through spot markets, forward markets, and futures markets. Since it is the “underlying” asset on which forward and futures markets are based, the spot market is the largest of the three.

When individuals talk about the forex market, they typically mean the spot market. Companies or financial institutions that need to hedge their foreign exchange risks out to a specified date in the future are more likely to use the forwards and futures markets.

Who trades in the forex market?

As discussed earlier, the foreign exchange market is where currencies are exchanged. It is also where continuous and ongoing forex trading takes place. Historically, the forex market was dominated by institutional corporations and major banks acting on behalf of their clients. Recently, however, it has increasingly become retail-oriented and traders and investors of all sizes have begun to participate.

All in all, banks, commercial companies, investment firms, hedge funds, retail FX brokerages and individual traders participate in the foreign exchange market.

Banks

Central banks, which represent their country’s government, are key players in the FX market. Their market activities and interest rate policies significantly impact currency rates. A central bank is in charge of determining the value of its currency in the forex market. This is the exchange rate system under which the country’s currency will be traded in the open market.

Every action a central bank takes on the foreign exchange market is done to maintain or boost the level of competitiveness of the underlying country’s economy. To make their currencies appreciate or depreciate, central banks and speculators may use currency interventions. For instance, during extended deflationary trends, a central bank may weaken its currency by increasing supply, which is subsequently used to buy foreign currency. As a result, the local currency is effectively weaker, increasing the competitiveness of exports on the international market.

These tactics are employed by central banks to reduce inflation. These also act as long-term indicators for forex traders.

Hedge funds & investment firms

Next to banks and central banks, this category makes up the second-largest group of participants in the currency market.

To trade foreign assets, an investment manager with a global portfolio will need to buy and sell currencies. While some hedge funds conduct speculative currency trading as part of their investment strategies, investment managers may also engage in such activity.

Companies

Companies that are involved in importing and exporting execute currency transactions to pay for products and services. Let’s take a German solar panel manufacturer as an example. Imagine that the company imports US components and sells completed products in China. After the final sale, the Chinese yuan received by the manufacturer must be changed back to euros. The German company must then exchange euros for dollars to get additional US components.

Businesses also trade forex to mitigate the risk involved with currency conversions. 

Individual Traders

In comparison to financial companies and organisations, the amount of forex trades conducted by ordinary investors is quite low. Yet, its popularity is fast increasing.

Retail investors base currency transactions on a combination of fundamentals including interest rate parity, inflation rates, and monetary policy expectations as well as technical factors such as support, resistance, technical indicators or price patterns.

Reasons to trade forex with IronFX

Individual traders can trade forex through IronFX’s MetaTrader 4 trading platform which allows traders, regardless of their level of expertise, to put their strategies to the test. They also get to access more than 500 tradable instruments across 6 asset classes including shares, indices, forex, futures, metals and commodities.

Flexible leverage, tight spreads, fast execution and copy trading are other benefits of trading with IronFX. Last but not least, daily market research and analysis as well as updated educational material are always available.

Exención de responsabilidad:

Esta información no se considera un consejo de inversión ni una recomendación de inversión, sino una comunicación de marketing