The foreign exchange market is one of the most decentralised global markets present today. Mainly using currencies as commodity for trading, this market is also known as the forex, Fx or currency market. Being a global market, it is unmatched in its dynamicity as well as its enormity.
Uniqueness of the forex market
The main players of the global markets are the large international or global banks. They are the ones whose intervention can cause anything from a ripple to a furore in this foreign exchange money market. But despite their currency interventions, the forex market is still said to be a prime example of perfect competition. This market is unique because:
- Of the high liquidity of this market whose trading volume surpasses every other thing in the world,
- Of the geographical dispersion exhibited by it,
- Of its non-stop operations on all days other than the weekends, it has earned the sobriquet “ the market which never sleeps”,
- Of the numerously varied factors which have an effect on its exchange rates,
- Of relative profits exhibiting low margins when compared to markets giving fixed incomes,
- Of enabling the traders to use leverage as a means of enhancing both profit and loss margins depending on the size of their accounts.
How are currencies traded
In this foreign exchange money market, generally currencies are traded in pairs. Thus one pair of currency forms a single trading commodity. The first currency is called the base currency while the other one is known as the counter currency. There is a positive co-relation between these two currencies and hence factors affecting one currency will affect the other currency by default.
A typical forex transaction involves the simultaneous buying and selling of currencies. In fact the buying position opens when a trader believes that there will be a subsequent increase in the exchange rate of the base currency. The selling position is opened up when the trader feels that its rate would decrease.
Participants of the forex market
The main participants or players who are actively involved in this market include
- Commercial companies wanting to pay for services and goods using foreign exchange,
- Central banks who help to stabilise this volatile market,
- Investment management firms who use the forex market for trading in foreign securities,
- Retail forex traders who participate through banks or forex brokers etc.
The foreign exchange market is a fascinating place for any person who has understood the nitty-gritty of trading in currencies. Also the fact that there is ample opportunity to generate very high revenue, entice people to try their luck here.