| What is the Foreign Exchange?
Foreign Exchange is the simultaneous buying of one currency and selling of
another. The off exchange retail foreign currency market ( FOREX ) is the
largest financial market in the world, with a volume of over $1.9 trillion
daily. Unlike other financial markets, the Forex market has no physical
location, no central exchange.
It operates through an electronic network of banks,
corporations and individuals trading one currency for another, spanning from
one zone to another across the major financial centers. Traditionally,
investors' only means of gaining access to the foreign exchange market was
through banks that transacted large amounts of currencies for commercial and
investment purposes.
Trading volume has increased rapidly over time,
especially after exchange rates were allowed to float freely in 1971. High
liquidity - The Forex market with an average trading volume of over $1.9
trillion per day. It is the most liquid market in the world.
Low transaction cost - The retail transaction cost (the
bid/ask spread) is typically less than 0.1% (10 pips or points) under normal
market conditions. At larger dealers, the spread could be smaller.
Uncorrelated to the stock market - A trader in the Forex market involves
selling or buying one currency against another.
Thus, there is no correlation between the foreign currency market and the
stock market. Bull market or a bear market for a currency is defined in
terms of the outlook for its relative value against other currencies. If the
outlook is positive, we have a bull market in which a trader profits by
buying the currency against other currencies.
Conversely, if the outlook is pessimistic, we have a bull
market for other currencies and traders take profits by selling the currency
against other currencies. In either case, there is always a good market
trading opportunity for a trader. Inter-bank market - The backbone of the
Forex market consists of a global network of dealers.
They are mainly major commercial banks that communicate and trade with one
another and with their clients through electronic networks and telephones.
There are no organized exchanges to serves a central location to facilitate
transactions the way the New York Stock Exchange serves the equity markets.
The Forex market operates in a manner similar to the way the NASDAQ market
in the United States operates, thus it is also referred to as an over the
counter ( OTC ) market.
No one can corner the market - The Forex market is so
vast and has so many participants that no single entity, not even a central
bank, can control the market price for an extended period of time. Even
interventions by mighty central banks are becoming increasingly ineffectual
and short lived. Thus central banks are becoming less and less inclined to
intervene to manipulate market prices. |