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Following the Forex Market
Following the Forex Market

The foreign exchange market - a global, worldwide-decentralized financial market for trading currencies - is available to trade from Sunday at 5:00pm ET/ 10:00pm GMT until Friday at 5:00pm ET/ 10:00PM GMT. Foreign exchange markets determine the relative values of different currencies and are the most liquid financial market in the world. Hours of continuous operation for the Forex markets is 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. Forex market has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. Some firms specializing in the foreign exchange markets have put the average daily turnover, in excess of US$4 trillion. Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with one another thus; there is no central exchange or clearing house.

The foreign exchange market is divided into levels of access. At the top of the foreign exchange market, is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens as you go down the levels of access, due to volume. When a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, aka, a better spread. By the size of the ‘line’, aka the amount of money with which they are trading, levels of access that make up the foreign exchange market are. The top-tier interbank market accounts for 53% of all transactions. Smaller banks, followed by large multi-national corporations which need to hedge risk and pay employees in different countries, large hedge funds, and even some of the retail market makers, are next in line.

Hedge funds have a reputation for aggressive currency speculation, since 1996 and as they control billions of dollars of equity and borrow billions more, they may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

To take advantage of the largest volume of trades, Forex traders would be watching the markets from 8:00am ET until 12:00am ET. Overlapping Forex trading for European and American Forex markets occur during this time, making the following currency pairs exceptionally volatile and potentially profitable: EUR/USD, GBP/USD, USD/CHF or USD/CAD. 

Forex traders rely heavily on consistently low spreads with their broker, without the discrimination of based on how much or how little you trade. Many brokers offer tight spreads, until you read the fine print. The spread is the number of pips (percentage in points) between the bid prices (selling price) and ask price (price you buy at). Spreads will vary dependent upon overall market conditions, volatility, and available liquidity and so on. The quality of your Forex broker can make a huge difference in whether you succeed or fail, at day trading the Forex market.

Steer clear of retail forex companies – some of which are nothing more than glorified bucket shops and are often referred to as market makers, since they essentially create their own trading markets. A bucket shop is a Forex broker where most of customers trading transactions go into a bucket and are never executed. All Forex traders, whether by career or a little Forex trading here and there, must maintain a Forex broker who provides timely execution of your trades. A forex ECN broker is the more legitimate as they provide a place where banks, traders, and multiple market makers can enter competing bids and offers around the spread amount. Although minimum trade requirements are often higher and leverage is lower with an ECN, prices are not manipulated, profits can be more stable, and trades are passed to a real trade.

Forex traders need to monitor charts, to trade any Forex currency pair. Without a chart, a Forex trader would be trading blind – a foolish move in anyone’s book. Certain currency pairs move against each other, in a generally consistent basis.  


March 2012


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