Thursday, December 2, 2021

What is Forex?

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Ruey L.
Full time trader, part time poker player.

Foreign exchange, or more commonly known as ‘Forex’, refers to the conversion of one currency to the other currency. It is done for a myriad of reasons including but not limited to international businesses, hedging, tourism, speculation and many more. Yes, tourism. The thing that we could do before the coronavirus pandemic.

A special thing about the forex market is that it is decentralised where currency trading is carried out electronically over-the-counter (OTC). This also implies that the market is open 24 hours a day and 5 and a half days a week. Trading begins in New Zealand as they have one of the earliest time zones (GMT+12), followed by other main financial hubs in the world. When a market is closing in one region, another market is waking up in another region to continue the trading activity. It is good news for currency traders whereby their trading activity is not limited by time and lack of liquidity. How long can you stay awake to trade?

Let us now take a look at the size of the forex market. Based on a survey done by the Bank of International Settlements, the trading volume reached a whopping $6.6 trillion in a day in April 2019. Compared to other financial markets, it is the largest of them all. The New York Stock Exchange, one of the largest stock exchanges, has a ‘mere’ monthly trading volume of 1.452 trillion USD. Actually, don’t mind the huge numbers, as the retail forex transactions only account for 201 billion USD of the daily turnover. But still, we beat NYSE by a huge margin. Retail forex traders unite!

Who are the big boys in the forex market then? The biggest banks, such as JP Morgan, Deutsche Bank, Citi and XTX Markets are the major players in the field, with the top 10 currency traders accounting for approximately 65% of the overall volume in June 2019. Other than the big financial institutions, there are the smaller banks, hedge funds, institutional investors, multinational companies, central banks, retail traders (You and I!) etc. 

Not only that, forex is one of the only financial markets that offer higher leverage to retail investors. Leverage trading refers to the use of borrowed funds to trade volumes more than what their account balances allow. However, we have to keep in mind that leverage can magnify both profits and losses. Therefore, be sure to carry out your own research and understand the implications of engaging in margin trading with leverage

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