The Foreign Exchange Market is the largest market in the world, and it can be found wherever a currency is traded for another. The forex market involves trading between numerous channels such as banks, multinational companies, currency experts, governments, and other financial institutions and markets. What makes the forex market distinctive from other markets? Some of those factors are the volume of trading involved, the number and kinds of traders involved, its trading hours, and the many factors that affect the outcome of the exchange rate.
Because of the nature of the currency markets, no forex market that is unified and single exists. What exists are a number of interconnected marketplaces. A single dollar rate is not present in the market, there prices are of different rates depending on who or what is trading. The trading process goes like this: Banks from all over the world participate in the trading, though the primary trading centers are in capital cities like New York, London and Tokyo. Each trading center waits for their sessions to begin, when the Asian session is finished, it will be followed by the European session, then by the U.S. session.
The traders wait for the market news to break in order for them to react on the results. For investment purposes, four primary currency pairs are usually used: the U.S. dollar against the Swiss franc, the U.S. dollar against the Japanese Yen, the Euro against the U.S. dollar, and the British pound against the U.S. dollar. The fluctuations in the exchange rate are mostly caused by the actual coming in and out of money as well as the changes in monetary flow resulting from new movements in inflation, budget and trade deficits, gross domestic product growth, interest rates and other conditions. People gain simultaneous access to news and information about what goes on at the market because major news is reported publicly at the same period.
Who are the participants in the market? Here are several of them:
1. Central Banks
Central banks are one of the most important players in the market. They can have control over factors such as interest rates, inflation, and the supply of money, and they often have set target rates for their currencies. They can bring stabilization to a market because of their foreign exchange reserves. The good thing about central banks is that they do not go bankrupt if they ever incur large losses.
2. Other Banks
Most of commercial turnover and big numbers of speculative trading are catered to by the interbank markets. Billions of dollars may be traded by established banks. Much of this trading is done for the bank’s own account, although some are done for the sake of the customers.
3. Hedge Funds
Hedge funds are known for going into bold currency speculations since the early 90’s. They have the tendency to overpower the intervention of central banks when it comes to supporting almost any kind of currency.
4. Commercial Companies
Companies tend to look for foreign exchanges to pay for services and goods, which is why they are a very important part of the market. The distinction of commercial companies from banks and speculators is that companies usually trade in small portions, and their activities often have minimal short term impact on the rates of the market. Even then, multinational companies can have unpredictable impact on the market, especially when there are cover ups of humongous positions in which market participants are not really aware of.
5. Retail Forex Brokers
They serve a large portion of individual traders and hold only very little of the total forex market volume. Brokers usually give services such as nonstop online currency trading. Their bread and butter come from offering bids or offers that are bigger than those offered by the Interbanks.
Clients can make sure if they are dealing with a legitimate broker by checking if he is registered as futures commission merchants (FCM) with the Commodity Futures Trading Commission. They should also be members of the National Futures Association or the NFA. The FCM status of the broker can be monitored at the NFA.
Those who are thinking of going into forex must study the venture as well as they can before investing in the cash. With much competition and complications, only the smart ones survive and prosper in the market.
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