FOREX market

Forex stands for foreign exchange. Forex trading is simply the trading of one currency for another. When trading forex, you are always trading a currency pair selling one currency while simultaneously buying another. It is one of the most actively traded markets in the world, with an average daily trading volume of $5 trillion.
A major difference between stock and forex markets is the fact that when you trade forex, you are simultaneously buying one currency and selling the other. This is different from how stocks are traded. You either buy the shares in the stock or sell the shares in the stock.

Forex is largely traded by:

  • Central Banks
  • Banks
  • Corporations
  • Retail traders
Central Banks

Central banks are usually meant to intervene in the FX markets. In 2012, the Swiss franc pegged against the Euro because the Swiss franc was appreciating too much against the Euro, and the central bank intervened and pegged the Euro at 1.2

Banks

Banks like Deutsche Bank, Goldman Sachs, HSBC where they trade Forex, but as a form of market making to provide liquidity to corporations. As well as to hedge their book in case they have any currency risk, then these banks will also trade the Forex market.

Corporations

Banks and corporations have a close working relationship. This is another form of Forex trading for corporations where they typically sell their own domestic currency in exchange for foreign currency to buy relevant raw materials that they need. This is how corporations dabble in the FX markets, and also to hedge whatever positions that they have that could be exposed to currency risk.

Retail Traders

Retail traders are like individual who speculate in the Forex market to earn a profit

The central banks are the largest, followed by major banks like Deutsche, Goldman, JP Morgan, and whatsoever. All these major banks have relations with investment funds and commercial companies like Toyota and Cadbury, and also hedge funds who want to trade in the FX market. On top of it, they also have connections to market makers and ECN brokers. From then on, this is where your own broker has a connection to you, the retail trader, through their own trading platform. This is how the ecosystem work.

Banks would communicate with your own retail brokers, commercial companies or investment funds. It does not mean that they will dabble in all three categories for the banks. Some of them may just choose to focus on investment funds, some just focus on commercials company or maybe some can have dealings with all three different categories. But you as the retail trader, you only have access to the connection with the market maker who then might pass on your order to the bank connection directly. May or may not depend on how your broker established their trading system

This is the hierarchy of the FOREX market:

Advantages of Forex Trading

High Liquidity

The forex market is extremely liquid. In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market trades $30 billion per day. The futures markets can’t compete with its relatively limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions

No commissions

No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail forex brokers are compensated for their services through something called the “spread“.

No fixed lot size

In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea).

Low transaction costs

The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. For larger transactions, the spread could be as low as 0.07%. Of course, this depends on your leverage and all that will be explained later.

24-hour market

There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.

At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market! As a trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride. Overnight markets in futures contracts do exist, and while liquidity is improving, they are still thinly traded relative to the spot forex market.

No one can corner the market

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.

Leverage

The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the markIn forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on. While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.et price for an extended period of time.

Low Barriers to Entry

You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $25. We’re not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Forex: Forex vs. Stocks/Futures

Advantages Forex Stocks/Futures
24-Hour Trading YES No
Minimal or no Commission YES No
Instant Execution of Market Orders YES No
Short-selling without an Uptick YES No
No Middlemen YES No
No Market Manipulation YES No

Forex Market Hours

The forex market can be divide up into four major trading sessions: the Sydney session,
the Tokyo session, the London session, and the New York session.

Spring/Summer in the U.S. (March/April – October/November)

Local Time EDT BST (GMT+1)
Sydney Open – 7:00 AM

Sydney Close – 4:00 PM

5:00 PM

2:00 AM

10:00 PM

7:00 AM

Tokyo Open – 9:00 AM

Tokyo Close – 6:00 PM

8:00 PM

5:00 AM

1:00 AM

10:00 AM

London Open – 8:00 AM

London Close – 4:00 PM

3:00 AM

11:00 AM

8:00 AM

4:00 PM

New York Open – 8:00 AM

New York Close – 5:00 PM

8:00 AM

5:00 PM

1:00 PM

10:00 PM

Fall/Winter in the U.S. (October/November – March/April)

Local Time EDT BST (GMT+1)
Sydney Open – 7:00 AM

Sydney Close – 4:00 PM

3:00 PM

12:00 AM

8:00 PM

5:00 AM

Tokyo Open – 9:00 AM

Tokyo Close – 6:00 PM

7:00 PM

4:00 AM

12:00 AM

9:00 AM

London Open – 8:00 AM

London Close – 4:00 PM

3:00 AM

11:00 AM

8:00 AM

4:00 PM

New York Open – 8:00 AM

New York Close – 5:00 PM

8:00 AM

5:00 PM

1:00 PM

10:00 PM

Open and close times will also vary during the months of October/November and March/April as some countries (like the United States, England and Australia) shift to/from daylight savings time (DST). The day of the month that a country shifts to/from DST also varies, confusing us even more. And Japan doesn’t observe daylight savings, so thank you Japan for keeping it simple.
Now, you’re probably looking at the Sydney Open and wondering why it shifts two hours in the Eastern Timezone. Also take notice that in between each forex trading session, there is a period of time where two sessions are open at the same time.
During both summer and winter from 8:00 AM-12:00 PM ET, the London session and the New York session session overlap. Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time.