What is a foreign exchange market?
Financial markets are one of the most important pillars of the world economy, and a large amount of money is circulating in these markets daily. The largest exchange rate among all financial markets is the foreign exchange market or Forex. Therefore, it is necessary to increase our knowledge about this market and become more familiar with its nature, features, and pros and cons.
Many small and large investors, banks, small and large companies, and even ordinary people are active in this market and are trying to take advantage of the high volume of capital and the huge liquidity in it; prices are not fixed, constantly fluctuating. Unlike the stock market, where the traded asset is a share with a specific name and price, there is a concept called currency pairs in the foreign exchange market, each of which is the common Currency of one or more separate countries. We will become more familiar with this large financial market in the following.
What is a foreign exchange market?
Exchange market” foreign is one of the financial markets with the highest daily money circulation. This financial market is decentralized and OTC; it is not run by an independent company or group and is open 24 hours a day (except on weekends).
“Foreign exchange market” is one of the types of financial markets with the highest daily money circulation among all markets. This word is an abbreviation of the term Foreign Exchange and refers to the exchange of common currencies of different countries. The daily turnover of this market is about $ 5 trillion. This is more than the total turnover of markets such as stocks and bonds. This is related to the amount of cash in the world. Since cash is the largest asset globally (over $ 200 trillion), it is only natural that the foreign exchange market should have the most liquidity.
The foreign exchange market is a decentralized financial market in the form of OTC, Which means that an independent company or group does not run it; It consists of a collection of computer systems and platforms worldwide. This market is active 24 hours a day (except on weekends), and thanks to its huge liquidity, there are many investment opportunities and profits.
The foreign exchange market is a ” sided market “; traders can benefit from both rising and falling currencies.
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The nature of foreign market transactions
Foreign exchange market transactions occur in markets consisting of different currency pairs such as USD / EUR or EUR / GBP. The Currency on the left is called the ” Base Currency,” and the Currency on the right (EUR) is called the “Currency. “
We said that this is a local market for the common Currency of countries. For example, in this market, you can pay dollars and receive euros in return. Or received dollars in exchange for the Japanese yen. The process is that in trading platforms or computer software that allow trading, it is offered for different currency pairs, different markets, or markets.
For example, in the EUR / EUR market, which is written as USD / EUR, the price shown is neither the dollar nor the euro; Instead, the price of the dollar against the euro is represented as a decimal number, which is obtained by dividing the price of the dollar by the dollar equivalent of the euro.
The Currency on the left (which is USD in this example) is called the “Base Currency,” and the Currency on the right (EUR) is called the “Counter Currency.” Naturally, because the euro is currently more valuable than the dollar, the result of this division will be less than one and approximately 0.85.
Investors and traders in a market like USD / EUR believe that shortly, the dollar will appreciate against the euro, or the euro will lose some value. In this market, the ” Buy Position” is open. They do. ” in the USD / EUR market, sell if they believe the euro appreciates against the dollar. If they predict correctly and the price moves in the direction they expect, they will buy the dollar cheaper and sell it more expensively, or sell the dollar more expensive and buy it cheaper and make a profit.
The most popular currency exchanges in the foreign exchange market are US Dollar to Canadian Dollar (USD / CAD), US Dollar to Australian Dollar (USD / AUS), US Dollar to Japanese Yen (USD / JPN), and the US $ 1 to Pound. Named the British Pound (USD / GBP) and the euro against the British Pound (EUR / GBP).
Foreign exchange market players
It can be said that almost anyone can operate in the foreign exchange market, But big players and big capitalists run every market, and they are the ones who determine the main market trend. The largest turnover in this market is related to big banks, hedge funds, financial institutions, international companies, and even rich people.
The high volume of liquidity and the fluctuation of currency prices create numerous opportunities for large-scale investment and profit, which is exactly what the main players are doing. For example, when a country’s central bank interest rate “, such news can directly impact the value of that country’s currency, and the major players in the foreign exchange market closely monitor such points.
The reason for price fluctuations in the foreign market
Several different factors can affect the value of a country’s Currency. For example, bank interest rates, inflation rates, unemployment rates, export volumes, economic growth, budget deficits, international relations, or even the election of a new president are all factors that affect the value of Fiat currencies, or the currencies of countries. Are.
The speech of the head of the central bank of an important country such as the United States, China, Japan, Switzerland, the announcement of seasonal or annual inflation rates, and such important news can increase or decrease the value of that country’s Currency and investors can easily follow the news. Use the created and buy the Currency that is most likely to grow or sell the Currency that will likely lose some of its value. Professional traders use the “Economic Calendar” to observe and plan important events.
The reason for the attractiveness of the foreign market
- Possibility of full-time presence
- Its high turnover
The foreign exchange market has made it possible for large institutions, governments, and large and small investors to exchange official currencies easily. These exchanges occur between different banks, and traders also benefit from them. These banks belong to different countries around the world.
For example, when the banks of Asian countries reach the end of their working hours, the European banks, especially the British ones, start operating, and then the American banks open. With the end of the day-to-day operations of American banks, it is the turn of Asia again, and this cycle repeats itself; In this way, traders will be able to be present in the market 24 hours a day.
The next attractive feature of the foreign exchange market mentioned earlier is its huge turnover (more than $ 5 trillion per day). To better understand this number, you can compare the total value of the ” digital currency market ” (Crypto Market) with it. When Bitcoin (the most popular digital Currency) peaked at $ 64,000, the total market value was only about $ 2.5 trillion! (Note that a market is generally worth more than its daily trading volume). This high liquidity in the foreign exchange market makes big players more inclined to inject capital and trade high amounts because there are always countless buyers and sellers.
Advantages and disadvantages of the foreign market
Activity in the foreign exchange market, like other financial markets, has its advantages and disadvantages. Before entering and operating in any market, we need to know its strengths and weaknesses. Among the advantages of this market, we can mention the following:
High access: Anyone can easily enter the world of this financial market through a broker. Creating an account and initial activation does not take more than three days, and you can start your activity with the amount of about $ 50. All activities are online, and the market is open 24 hours a day (5 days a week). Brokerage platforms provide users with all the necessary information such as current prices, news, analysis tools, and strategies.
Leverage capability: A “leverage” capability enables traders to make larger profits from the market with less investment. (Leverage is the coefficient that a broker allocates to the trader’s capital and lends him money to enter the trade with larger numbers and make more profit). The foreign exchange market has more favorable conditions for trading with high levers such as 100, 200, or even higher than any other market.
High profitability in a short time: Thanks to market fluctuations, high liquidity, and leverage, traders can make faster profits in this market.
Bilateral Trading: We know that this market is bilateral, and we can benefit from both the increase and decrease of the value of currencies. The remarkable thing about this market compared to other two-way markets is that even when we believe in devaluing one Currency, we sell it and receive another currency in return. such as commodities and derivatives.
High liquidity: Having the largest liquidity and daily exchanges, the foreign exchange market has become one of the most attractive financial markets. This capability attracts capitalists and even self-brokerages to operate in this market.
Different technical strategies: This market can be well studied with ” Analysis,” and price trends can be predicted. The knowledge of Fundamental Analysis” is always helpful, but many traders believe that significant profits can be made in the foreign exchange market with technical tools.
Lack of likelihood of price manipulation: Price manipulation occurs in any market; Such actions in the stock market, bond market, or even commodity market may be done by some shareholders or influential people; But controlling and penetrating a market as large as the foreign exchange market is a very difficult and unexpected task. On the other hand, since those who may be aware of the future fluctuations of a country’s currency price are more likely to be government officials, and these people are more under the magnifying glass of critics and the news, the possibility of such issues and sabotage in this market Lower.
Low commissions: Trading in corporate stocks, bonds, or commodities often involves expenses such as taxes and maintenance of the commodity. There are no such costs in the foreign exchange market. Even so, owning one is still beyond the average person’s reach. The spread is the price difference between the highest buy order or Bid and the lowest sell order or Ask.
