9 things every trader should know about the forex market

If you are interested in the financial market, especially forex trading, then it is pertinent that you have [at least] basic knowledge about the forex market. As such this article intends to shed some light to expose some of the most common characteristics that every trader should know about the forex market before trading forex and CFD.

 

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What is the forex market?

The forex market is where banks, hedge funds, commercial firms, investment companies, investors, and retail traders from around the world can buy and or sell foreign currencies that they speculate will either gain or lose value over time. It is to be known that the forex market is always moving 24 hours a day, 5 days of the week.

Opening and closing hours of the forex market:

  • Opens: Sunday, 5 PM E.S.T
  • Close: Friday, 4 PM E.S.T

The forex market is open 24 hours daily particularly due to the different time zones around the world. For example, Sydney forex market hours open at 4 PM EST and closes at 1 AM EST, while the Tokyo market hours open at 7 PM EST and closes at 4 AM EST. 

This goes without saying that even after traders within the Sydney time zone stops trading at 1 AM, traders within the Tokyo time zones are still trading up until 4 AM, thus allowing the market to move continuously.

How big is the forex market?

Since the forex market is being accessed and utilized by traders and companies on a global scale, it is recognized as the largest financial market in the world, amassing a trading volume of an estimated US$6.6 trillion daily according to the Triennial Central bank survey of foreign exchange and over-the-counter (OTC) derivatives markets in 2019, which can be found at BIS.org

Different types of Forex market

There are currently three types of forex markets, which Investopedia identifies as:

  • Spot
  • Forward
  • Future

Spot forex market

Spot forex market is described as the immediate exchange of foreign currencies between the buyers and the sellers at the current exchange rate and a cash-only transaction done on spot. Spot market trading makes up the majority of the currency trading due to its key players being:

  • Commercial firms/ banks
  • Investment firms/ banks
  • Central banks
  • Forex brokers

Forward forex market

The forward fx market involves two parties with the likes of, governments, individuals, or firms/companies, which agree to exchange currency at a specific price and quantity at a later date.

Future forex market

The future market is similar in nature to that of the forward market, however, the futures market is centralized to ensure liquidity while the forward market is not. This goes without saying that the forward market has the least liquidity of the three forex markets.

How can I trade the forex market?

If you are residing in a country that legalizes forex trading as well as being of proper age, assuming you wish to trade for yourself, then you’re able to access the forex market only by creating a forex trading account with among the best foreign exchange trading platforms.

How much do money do I need to trade the forex market?

While the recommended minimum amount needed to trade the forex market is $200, among the best forex trading brokers, some allow traders to deposit money as low as $1. Additionally, some offer the latest forex welcome bonus, which is an additional amount added to your real trading account along with your initial deposit.

For example: 

-> Bonus: 50%

-> Trader deposit: $200

-> Forex Broker Deposit bonus: $100 (50% x $200)

-> Total deposit: $300

If that does not sound good enough, there are even forex brokers that are offering a “no deposit forex bonus“. In other words, free money that they give to verified and registered clients to start their trading journey.

9 facts about the forex market

1. No one owns or controls the forex market

The ownership of the forex market belongs to no one individual, government nor firm/company. It is there to be legally accessed by anyone who wishes to do so.

2. Bank influence price movement through supply and demand

Banks being the largest key players in the forex trading game moves the market by buying or selling a large quantity of the assets thus increasing decreasing the value of that asset.

3. 6 trillion dollars is the daily trading volume of the forex market

Senior Economist Vladyslav Sushko discusses the main findings of the Triennial Central Bank Survey which shows that the global foreign exchange turnover as of April 2019 is a whopping US$6.6 trillion. In fact, forex has grown in popularity since then, hence it is safe to assume that the daily volume is now between US$7 – US$10 trillion.

forex market
Forex Daily trading volume

4. The forex market is the largest financial market

Wallstreetmojo.com describes the different types of the financial market as:

  1. Spot market
  2. Money market
  3. Capital market
  4. Derivative market
  5. Commodity market
  6. With the Foreign Exchange (forex) market being the most liquid of them all.

5. The forex market is the most heavily regulated financial market

Since the market has unlimited earning potential, it is compelled to have a few “bad apple” who wishes to prey on the innocents’ desire to make money through various unscrupulous business activities.

In other to keep the forex market a trader-friendly marketplace, those unethical behaviors need to be filtered out. Hence regulatory bodies in respective regions were created to monitor the behavior of all financial firms especially ones that part take forex trading.

6. The supply and demand of an asset is what moves the forex market price

As mention in the second point above, the supply and demand of an asset influence the up and down movement of the asset being traded.

REMINDER: As demand for an asset increases, the value #price increases. As the supply for an asset increases, the value of said asset decreases; Vise-versa.

forex market
Supply and demand curve

It is due to this fact that traders can profit from trading supply and demand zones, which are key areas where the market price of an asset tends to reverse, and ultimately changes trend.

video: How to trade supply and demand zones

Trend reversal | How to trade them ...
Trend reversal | How to trade them properly (2020)

7. You need a forex broker to access the forex market

You need to register with any of the available platforms to trade forex. Forex brokers act as a middle man between the forex market and the trader/firm. However, it is best to register with a regulated broker with tight spreads and low commissions. For your convenience, a list of the best forex and CFD brokers is provided here.

8. The forex market moves in 3 ways/ directions

The movement of the forex market is limited to only 3 different possibilities. Namely:

  • Up: The upwards movement is considered to be an uptrend, indicating that the base currency of the currency pair is gaining value. Therefore, it is recommended to only look for buy opportunities in an uptrend.
    Forex uptrend
    H1 Uptrend
  • Down: When the market price is a downward movement, it is considered to be in a downtrend. In this type of movement, a trader should only seek sell opportunities to increase his/ her probability of winning such trade(s).
    forex terms
    USDCAD H4 downtrend
  • Sideway: This type of movement is recognized by the prolonged side-way movement of the market price. This is due to the price repeatedly failing to break a resistance (ceiling) and a support (floor) thus causing it to bounce up and down between the two levels over an extended time.
    forex ranging market
    Ranging / consolidating / side way market

 

9. Volatility is needed for the forex market to move

Volatility is the fuel behind the movement of a financial asset. To put it differently, if there’s no volatility, then there’s no movement. And if there is no movement, then traders would not make any profit due to the price being stationary at one place.

  • Forex marketTraders: Traders open their desired positions; ie: buy or sell

  • Supply and demand: Depending on the asset being traded and the position being open, The supply and demand of an asset increase accordingly.

For example;

When selling EURUSD, the supply for the EUR increases, while the demand for USD increases. On the other hand, when buying EURUSD, the demand for EUR increase while the supply for USD increases.

NOTE: It’s important to know and pay attention to the difference between the base and quote currencies to know which is gaining or losing value against each other.

 

forex market
base vs quote currency
  • Volatility: The supply and demand move the market up and/ or down.

  • Profit: traders make a profit on the position(s) when the market goes in their direction respectively.

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