The Forex Market

The Foreign Exchange Market (Forex)

The Forex Market

 

Forex in General

The Forex or FX is the Global Foreign Exchange Market where the world’s currencies are traded against its other. The Forex Currencies are traded in pairs and are divided into Majors, Minors and Exotic Forex pairs. The Forex market is the largest and the most liquid financial market in the whole world. The daily turnover activity in the Forex market is estimated more than 4 trillion USD. The Bank for International Settlements reported in 2012 that the Forex market exceeded 4.9 trillion USD per day.

Forex Market Participants

The Forex market includes many different types of participants like:

1) Banks (Central, Retail or Investment banks)

2) Retail and Institutional investors

3) Day-Trade speculators

4) International and National Firms

5) Forex Brokers (ECN, STP and Dealing-Desk Forex Brokers)

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The Forex market operates like the World Wide Web (internet) does, as it is not centralized and gives access to anyone who has a PC terminal and can meet some basic requirements. Forex trading is conducted electronically OTC (over-the-counter), meaning that all trades are executed via computer networks between currency buyers and sellers. The Forex market is open five days a week, 24 hours a day. The world’s major Forex marketplaces include New York, London, Zurich, Tokyo, Frankfurt, Paris, Hong Kong, Sydney and Singapore. This means that when Forex trading ends to one place starts to another.

Forex Trading Hours (EST)

Australia Session: 5 p.m. – 1 a.m.

Tokyo Session: 7 p.m. – 3 a.m. 

Hong Kong / Singapore Session: 9 p.m. – 5 a.m. 

Frankfurt Session: 2 a.m. – 10 a.m. 

London Session: 3 a.m. – 11 a.m.

As it can be seen the Forex market includes sessions when two different markets are opened at the same time, what is called as Forex sessions.

Forex Sessions Overlap

a) London and New York sessions overlap from 8 a.m. to 12 a.m. (EST tome) 

b) Tokyo and Sydney sessions overlap from 7 p.m. to 2 a.m.

c) Tokyo and London and Tokyo sessions from 3 a.m. to 4 a.m.

 

The Majors, Minors and Exotic Currencies

In a currency pair (ie EUR/USD), the first currency is the base or the primary currency (EUR) and the second currency is the quote currency (USD). Forex currencies are divided into majors, minors and exotic currencies. Majors are very popular and are offered in narrow spreads. 

1) Major Currencies

USD (US Dollar)

EUR (European Euro)

GBP (UK Pound Sterling)

JPY (Japanese Yen)

CHF (Swiss Franc)

The US Dollar involves about 85% of the total daily Forex market turnover. The Euro involves about 37% of the total daily Forex market turnover while the Japanese Yen involves about 17% and the Pound Sterling about 15% of the total Forex daily turnover. The Swiss Franc involves 7% of the total Forex trading turnover.

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2) Minor Currencies

The minor currencies are mainly the currencies of countries rich in natural resources (gold, oil etc).

AUD (Australian Dollar)

CAD (Canadian Dollar)

NZD (New Zealand Dollar)

SEK (Swedish Krona)

NOK (Norwegian Krone)

DKK (Danish Krone)

The Australian Dollar which is called also the Aussie involves about 6.5% of the total Forex market daily turnover. The Canadian Dollar involves 4.2% while the New Zealand Dollar which is called Kiwi involves 2% of the total Forex market daily turnover.

3) The Exotic Currencies

HKD (Hong Kong Dollar)

SGD (Singapore Dollar)

RUB (Russian Federation Ruble)

MXN (Mexican Peso)

ZAR (South African Rand)

KRW (South Korean Won)

INR (Indian Rupee)

 

The Spot, Forwards and Futures Markets

These are the three ways an institutional or a retail investor can participate the Forex market and exchange currencies. Forex trading usually involves the spot market. The Futures & Forward Contracts are used mainly for hedging against unfavorable market risk. Forex example an importer of Mercedes based in Japan needs to hedge against future Euro unfavorable appreciation so he buys a Forward contract based on Euro against the Japanese Yen. The Futures contracts are bought and sold on organized financial exchanges. From the other hand, the forwards contracts are bought and sold in OTC marketplaces. Usually banks are offering Forward contracts to large international firms.

» The CBE Options & Futures Exchange | » ASX Futures & Options | » The Future Markets at Reuters

In the US, the regulating authority of the futures market is NFA (National Futures Association). » NFA Futures

 

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