Wagering on the Forex Market
If you are considering currency trading, you should be an experienced trader who can handle financial losses. Forex trading is risky and is not suitable for most investors. If you have been an active day trader, you likely have the skill set applicable to exchange successfully, or at least possess a rational understanding of the risk involved. It is prudent to keep in mind that market maker forex brokerages are not motivated to help you turn a profit. Quite the opposite, in fact. For the most part, brokers collect money from you regardless of whether you gain or lose, so they have little motivation to help you make money.
When selecting a broker, you need to consider whether the broker is a market maker or an Electronic Communications Network (ECN) broker. For the most part, market makers are considered the more nefarious of the two since some have been known to manipulate spreads artificially for their own gain. The more honest market makers only make money off the actual spread between the buying and selling price. ECN-type brokers usually just charge a commission but do not make money off the bid-ask spread, so they are not motivated to manipulate spreads. Be sure to read all fine print and contract details before opening a new account.
The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. EBS and Reuters’ dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies.
The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.
In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:
- its huge trading volume representing the largest asset class in the world leading to high liquidity;
- its geographical dispersion;
- its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- the variety of factors that affect exchange rates;
- the low margins of relative profit compared with other markets of fixed income; and
- the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements, as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.
The $3.98 trillion break-down is as follows:
- $1.490 trillion in spot transactions
- $475 billion in outright forwards
- $1.765 trillion in foreign exchange swaps
- $43 billion currency swaps
- $207 billion in options and other products
(indication of source:wikipedia)