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The forex market is a single global market which facilitates across the counter trade in currencies. It is open 24 hours on all five working days of the week so that traders can deal with others across all the time zones. This makes it the largest among all the financial markets, with a daily currency exchange turnover of around $4 trillion.
While the market is global and decentralized, it still has its own system and trading strategies that are specific to currency trading. New traders getting started with FX trades need to brush up on a few concepts like pips and spreads and currency pair values. The volumes are higher, profit margins are lower and the leveraging is a lot more extensive than other markets.
Another big difference is that players here are divided into different levels. At the top is the inter-bank market which is limited to large banks. The tiny spreads (ask/bid price difference) on transactions between these banks are not known to outsiders. The spread increases as one goes down this totem pole and trade volumes decrease.
The next level is composed of smaller banks, hedge funds and multi-national companies. The multi-national companies need to exchange currencies because they have to make payments in foreign currencies to suppliers and their local staff in different countries. Institutional investors like pension funds and insurance companies are also big FX players.
Then there are the international money transfer companies, with each company posting massive turnovers of tens of billions of dollars. But the sector that is attracting the most attention these days and growing fast is the retail foreign exchange trader. This is an individual trader who participates via a trading platform provided by a broker.
The entry requirements are very modest, and millions of people are using the internet to engage in online FX trading. All that is needed is an account with a broker with at least a minimum balance, and a computer with a broadband connection. Of course, those who do well at it tend to need a lot more tools.
This means getting to know all the indicators and signals that can be used to build a forex system, or at least know how to use a system that matches the trader’s philosophy and trading style. Technical analysis can be sued to detect trends, and many keep track of currencies via the news and macro economic and political conditions on the ground. All said and done, the forex market is kind of a big deal and there’s literally and figuratively a lot of money involved in trading currencies.
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