WHAT IS THE FOREX MARKET?
The forex, or Foreign Exchange market is the biggest financial market in the world. Made up of banks, commercial companies, central banks, investment management firms, hedge funds and retail forex traders and investors.
This market place allows almost anyone with a laptop and Wi-Fi to trade by buying or selling currency pairs to try and make a profit. It presents us with a great money making opportunity; with our guidance we can help make that a reality.
The market is open 5 days a week 24h/per day opening Sunday evening at 10pm and closing Friday evening at 10pm. Anyone can make a call using technical and fundamental analysis and try to predict the market’s next move.
All of these currencies are traded in pairs, for example EURUSD (Euro-US Dollar).
From here you would either buy or sell depending on your analysis.
They will look something like this in your watch list:
Results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This market continues to grow but the volume is huge which is why there is so much opportunity to make money, providing you know how.
The main trading centres
There are a few main trading centres worldwide including London, New York, Hong Kong,Frankfurt, Singapore, Paris, Sydney and Zurich.
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The fact that the markets are open 24 hours a day allows you to hold your trades for a long period of time and still be able to actively monitor them. Holding your winners and cutting your losses is a major topic, which we will go into later.
Where does the Forex market come from?
The 1880s were seen as the beginning of the modern Foreign Exchange market. Prior to this there was much more limited control over trade due to the first world war.
This is just a very brief overview of some historical events leading up to the Forex market being born. The reason we don’t go into too much detail is that you don’t really need to know all of this to trade, but it’s good to know a little history if you plan on becoming an expert.
The gold standard monetary system was created in 1875 and is down as one of the most important events in the history of the Forex Market. Prior to gold standard being created countries would often use gold and silver as a method of international payment. The whole idea of this was that governments could guarantee the conversion of currency into a specific amount of gold and vice versa.
The gold system was temporarily abandoned, having broken down at the beginning of the first world war due to tensions between Germany and major European powers because of their huge military projects.
Financially this was a huge burden as there wasn’t enough gold at the time to exchange for the enormous amount of currency that the governments were printing.
The Bretton Woods system of international monetary management was created in 1944 where more than 700 representatives from the allied nations met up to set up a monetary system in order to fill the void of the gold standard system.
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This led to: a method of fixed exchange rates, the US Dollar replacing the gold standard to become the primary reserve currency and the creation of three international agencies to oversee economic activity: the International Monetary Fund (IMF), the General Agreement of Tariffs and Trade (GATT) and the International Bank of Reconstruction and Development (IBRD).
As businesses, banks, relations and trade grew in the1980s so did the telecommunications and computer industries, which encouraged a big surge in the financial markets worldwide as accessibility was drastically improving.
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As the market continues to grow so does the volume of people and money moving through the markets. It’s unbelievable to think that in the 1980s transactions totalled approximately $68 billion per day whereas the most recent surveys of 2014 estimated a whooping $5 trillion per day.
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This will continue to grow and is the reason why we love the Forex markets; because of the unlimited opportunity flow.
Who trades the Forex market?
Commercial Companies
An important part of the Forex market is the companies seeking foreign exchange to pay for goods or services. They usually trade fairly small amounts compared to banks but contribute to trade flow which is important to the long term effect on the market.
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Central Banks
Central banks play an extremely important role in the Forex markets.
They try to control the money supply and inflation and often have official or unofficial targets for rates that they want each pair to be. There are a small number of main central banks who release monthly and quarterly high impact news which affect the market dramatically and they’re even used to stabilise the markets at times. We cover Central Banks in great detail in the Fundamentals section of the course.
Hedge Fund and Investment Management Institutions
Since 1996 Hedge Funds have gained a reputation of aggressive currency speculation, with funds under management totalling into the billions. Investment Banks and Hedge Funds usually look after a large portfolio of clients with a large amount of capital.
Approximately 70-90% of the Foreign Exchange transactions are speculative, meaning that the person or institution that bought or sold a currency have no plan to take delivery of the currency, they are just speculating on a prediction of the movement of a certain pair in order to make a profit.
Retail Forex Traders
Retail Traders are the individuals trading their own money from their home or office. This category of traders is growing very considerably. It’s more accessible than ever to trade in the Foreign Exchange market. All you need is: a laptop or computer, internet, access to charting software, a broker, the correct education and you’re ready to go. Retail Traders use a combination of technical and fundamental analysis to make their trades.