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What is the Forex Market?

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What is the Forex Market?

So, you know about the stock market. You may have even traded on the stock market. Now, you want to get involved in forex trading, but first, you need to answer a couple of key questions. What exactly is forex? And what is the forex market?

These are questions that many people have. Whether you have trading experience or not, it is OK to ask questions about the forex market. Here, we will do our best to provide some answers.

 

Getting to Know the Forex Market – The Basics

Forex actually refers to foreign exchange. That is, the exchange of one currency for another. So, when we talk about forex trading, generally what we are talking about is the exchange of currencies.

The forex market is essentially the global marketplace upon which all the exchanges of these currencies happen. Anybody, a regular trader, professional trader, or institution, who wants to exchange one currency for another is active in the forex market.

As a simple example of this, when you want to take a vacation to a foreign country and you exchange your currency from one to another through an exchange location, you have completed a forex trade.

You will also often hear that the forex market is in fact, the largest trading market in the world. It is much larger than any of the global stock exchanges in terms of volume, with more than $5 trillion worth of trade taking place on a daily basis.

Where is the Forex Market and How Does it Operate?

Beyond its tremendous size when considering volume of trades, one of the most unique aspects of being involved in the forex market is the location. Unlike stock exchanges in New York, Tokyo, London, and other cities around the world that have physical locations that trading takes place, the forex market is decentralized.

This means that forex trading does not take place in one specific place, or through one main authority. The entire market is also traded electronically with transactions moving through a variety of global networks facilitated by brokers and liquidity providers.

Essentially, what this allows is for the forex market to operate around the clock and all over the world with ease. When one market closes for trading, another is open. This means that the forex market can be traded on 24 hours a day, 5 days a week as there will always be a market open in some location during these times.

Safety and Regulation in the Forex Market

With the forex market being decentralized as we mentioned, you may have some questions as to whether it is still safe to trade forex, and who regulates a decentralized trading market like this. The answer is, first and foremost, trading in the forex market is typically very safe. This ultimately depends on your broker and who regulates that broker, but the overwhelming majority are well-regulated and very secure for trading. This is of course one of the key concerns if you are thinking about trading forex and something that you should dedicate time to thoroughly investigating and confirming.

Due to the decentralized nature of the forex market, there are many regulators all over the world who oversee the operations of forex brokers in particular. Depending on the country you are based in, it may be mandatory for your forex broker to be regulated by a particular authority.

Some of the most respected regulatory bodies in the world of forex include CySEC operating within Europe, FCA who are based in the UK and are a top-tier regulatory authority there, ASIC who are Australia based, and the CFTC and NFA in the U.S. where regulatory conditions are comparatively strict. There are a host of other regulators too who typically provide trusted protection to forex traders around the world.

Each regulatory body imposes its own rules and regulations and it up to the individual forex brokers if they wish to pursue regulation from that authority. Some regulators such as CySEC employ regulations to limit the amount of trading leverage that is available, while trading of CFDs in the US is banned completely by the NFA.

How to Get Involved in Forex Trading

The very last step, once you have gotten to know a little about the forex market and how it works, is to get involved and start trading for yourself. This requires that you choose a forex broker to sign up with.

As mentioned already, the vast majority of these brokers are recognized and well regulated around the world. This means that they all take your security as a trader very seriously. The best thing you can do as a new trader is to try out a demo account first. These often function just like the real thing, but with no risk attached. This can allow you to see if you enjoy trading with a particular broker.

Once you have checked out and verified that the broker is well-regulated by a respected authority, then getting involved in the forex market can be as simple as verifying your account and making your first deposit. Depending on how they operate, a broker may provide you access to the direct market forex rates, or they may act as a market maker themselves creating their own exchange rates. This is something that you will need to decide the benefits of based on your own trading style.

Final Thoughts

Overall, the forex market has the highest daily volume of trading in the world, far beyond that of any other trading market. That brings with it a variety of opportunities for those interested in getting involved in forex trading. Once you have stepped over the initial entry barriers and gotten to know more about the sector, it can be an excellent way to improve your trading skill and diversify any portfolio. The key is in choosing a top forex broker, but with many offering extensive forex educational sections to help you get started, the choice is all yours.

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Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.

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GBP Forex Market Not Disturbed by Leaders Condition

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GBP Forex Market Not Disturbed by Leaders Condition
  • British PM Boris Johnson Admitted to Intensive Care
  • GBP Gaining Slightly Against Dollar
  • US Markets Continue to Look Upwards

Sterling has gained momentum early against the US Dollar. Forex trading in the market does not appear to have been hampered at all by the fact that British Prime Minister Boris Johnson has spent the night in an intensive care unit. He is in ICU at St. Thomas’ hospital in London after his persistent coronavirus symptoms apparently worsened. These gains are in stark contrast to the pressure the market has been under in recent weeks. It points to renewed optimism in the US market as traders move away slightly from the Greenback.

Britain Remain Upbeat on Prime Ministers Condition

Many may have expected the surprising news on Johnson’s admission to intensive care to have shocked the markets on Tuesday. The reaction though, has been much more optimistic than predicted. This confidence from the market has seen forex brokers open to a busier than expected Tuesday as the US trading session gets underway. It has also been matched by a similar positive tone from Downing Street. The Prime Ministers spokesperson said he was “stable”, and in “good spirits”. This after having been admitted to hospital on Sunday before being transferred to the intensive care unit yesterday.

The leader was diagnosed with coronavirus more than 10 days ago before being admitted to hospital over the weekend for testing with what he referred to as “persistent symptoms”. For the moment, Dominic Raab, the First Secretary of State for the UK, is deputizing for the hospitalized Johnson.

Pound Gains on Movement Away From USD

The GBP/USD forex market was up more than 0.5% in early trading despite the news surrounding the Prime Minister. This movement comes more from the fact that traders have begun pulling back from the US Dollar and the safe haven that it has been in recent weeks. This movement is still tentative, but regardless of the political news and how it may impact the Pound, the pair is currently continuing to ride the wave of positive market sentiment.

There are certainly more twists and turns to come in the days and weeks ahead. For the moment though, with no significant changes in leadership or direction looking likely in the UK, the Pound has managed to stay relatively steady, and benefit from the USD pullback of the last 24 hours.

Positive Signs as Stocks Jump on Opening Bell

Yesterday’s rally on Wall Street has continued into the morning trading session in New York. All major markets increased sharply early on in the morning. The NASDAQ, and S&P 500 both gaining more than 1% immediately. The Dow Jones also rocketed more than 800 points.

Movement has settled somewhat at the time of writing, but the positivity looks set to continue, with traders rebalancing their portfolios amid a hopeful drop in cases of coronavirus. There is still a long road ahead though before market confidence is fully restored.

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GBP Forex Market Not Disturbed by Leaders Condition
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What is Hedging in Forex?

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What is Hedging in Forex?

Hedging as it applies to the forex market and trading, at its most basic form, is a strategy to protect you from losing big in a certain market position. There are many types of hedge that move from the very simple, to the more complex if you are an advanced trader, but the premise is the same. To protect your position in one currency pair by placing a trade within that same market in the opposite direction.

The Fundamentals of Hedging in Forex

The first point to note is that hedging is not always permitted by all brokers. Therefore, you should check their policy first. As mentioned, the majority of traders who engage in hedging are doing so to provide themselves with a form of protection in the event of adverse market changes. By nature, hedging is particularly common in times of market volatility when the movement is quite unpredictable.

Hedging in the forex market is also more common than in many others. This is often due to the fact that the forex market can be seen as slightly more volatile than many others that are traded. As a forex trader, there are several types of hedge that you can place to protect your position in the market.

Forex Hedging Strategies

While there are a range of hedging strategies available that vary in complexity, here we will outline some of the most common you can utilize depending on your broker policy and level of experience.

Simple Forex Hedging

This strategy is also known as direct hedging. It is one of the most widely used, and easy to understand hedging strategies. Direct hedging occurs when you open a position to buy (or go long) on one currency pair. You then open the same position to sell that currency pair (short).

There may be a number of reasons for doing this, but in any case, a few things happen. You now have two open positions in exactly the opposite direction. Although you do not make a profit on the actual hedge itself, it does allow you to keep your original position. This means you do not have to close your original position for a loss, and can instead start to make money through your short position. Maintaining the original position also means you could again profit if the market trend reverses.

Multiple Currency Hedging

Moving into one of the more complex hedging strategies. If you are trading in multiple currency pairs, then this strategy could be effective to a certain extent for you. Multiple currency hedging takes place when you but a long position, and a counteracting short position in one of those currencies.

For example, you may take a long position in the GBP/USD market, and a short position in the USD/JPY market. In this example, you are protected against your USD exposure to a high degree. This strategy though does not cover movements in the other currencies you are exposed to though. In these cases, if the JPY, or GBP were to fluctuate, you would still be exposed.

A variation of this strategy also sees traders take long and short positions in currency pairs that are positively correlated, meaning that if one currency pair goes down, the other will go up. Such an example of these positive correlated pairs may be the GBP/USD, and EUR/USD. So, if you hold a buying position in one, and selling position in the other, in theory, they should offset. Still though, this is not as exact a strategy as a simple direct hedge.

Forex Options Hedging

An option in forex is an agreement to exchange at a specific price in the future. It is a common instrument used by forex traders who wish to hedge their position. Again, this is referred to as something of an imperfect hedge since it can still result in some losses for you as a trader.

Using an example of how you may buy a forex option to hedge your risk, consider the following:

You have gone long on the EUR/USD at $1.08 expecting the pair to go higher. You are now concerned though that it may fall further on the release of economic data coming in the next few days. In order to mitigate this risk, you may but a put option with a strike price at something like $1.07 on the pair, and an expiration date of the option at some point beyond the data release.

If the pair then does go lower, the trader is paid out on their option based on the contract conditions set. If the news does not materialize, and the pair continues to go higher, then the trader can continue to hold their long position and will have only lost the premium set out in the option contract.

Who Hedges Forex and is it Worth It?

While only you as a trader can make the decision on whether hedging is worth it, the benefit of engaging one of the strategies mentioned here is that you do limit at least some of your exposure in the markets you are trading. Timed right, it can also put you in a more profitable position.

The question of who hedges in forex is more complex, but generally speaking, as long as the forex broker you are trading with allows hedging, then there is nothing to stop you from doing it. It is important that you understand why you are hedging and how you want the market to react but beyond that, almost all levels of trader can get involved with at least some of the strategies above.

Forex Hedging Fees and Costs

There are no direct fees related to forex hedging, but depending on your broker, you may have to pay a commission or spread on the market you are trading. This, as well as any other fees like a swap-fee if you are keeping the position open, are some other important things to factor into your calculations when determining if you should try hedging in forex.

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US Unemployment Rate Doubles Causing Forex Market Waves

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US Unemployment Rate Doubles Causing Forex Market Waves
  • Rate has doubled from Previous Weeks Record
  • Record High is worse than Analysts Predicted
  • EUR/USD Slides Again as Oil the Only Positive

US unemployment rate figures just released make for very grim reading. A hammer blow to start Thursday, the figures show that more than 6.6 million Americans filed for unemployment benefit amid the ongoing COVID-19 crisis. These numbers more than doubled the already unprecedented record of 3.3 million jobless claims from the previous week. The market has been somewhat slow to react to this news, but remains poised for the jobs report to be released later today.

New and Unwanted Records Being Set

Last week’s unemployment numbers of 3.3 million were far beyond the previous record high set in 1982. The number was almost 10 times greater than that set almost 40 years previous. The new weekly number from today puts that even further into the shadows. These are unprecedented times of difficulty throughout the US and global economy which show little sign of let up at present. At the time of writing, the Dow Jones was trading 150 points lower on release of the news which sees more than 10 million people in the US now filing unemployment claims in the past two weeks.

Some solace can be found in the fact that the latest $2 trillion stimulus package has made it easier for workers who have been furloughed in the crisis to remain on unemployment benefit, and also expanded the scope of those who could apply for the benefit. The previous high of 695,000 claims in 1982, and the 665,000 during the previous financial crisis of 2009 now seem miniscule by comparison.

Numbers Outpace Expert Prediction as Euro Falls

Analysts had predicted that numbers would should a marked increase. The results though, have gone far beyond even what the most pessimistic of onlookers imagined. This movement looks set to continue with more labor data to come on Friday. This government data release is set to show more huge losses across the board.

The forex market impact is already being felt as the EUR/USD market fell back below the $1.09 mark. The currency pair had worked hard over the previous week to build back up significantly, but on release of more negative data from the US, it has given way to the continually increasing safe-haven role of the greenback.

Oil Rebound Provides Glimmer of Positivity

At the opening bell, the one positive to garner from the start of the day comes from the news that the price war between Russia and Saudi Arabia may be nearing an end. Prices rallied across the oil markets more than 10% on these hopes. Nothing has been ruled out and there hasn’t been any concrete word besides an offering on Wednesday from US President Trump that the two sides would “work it out” in the coming days. This news would appear to have some truth behind it and has bolstered the market from record low levels.

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US Unemployment Rate Doubles Causing Forex Market Waves
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US Unemployment Rate Doubles Causing Forex Market Waves
- #1 Broker in UK
- Singapore Welcome
- Australia Welcome
- 12,000 + Global Markets
- Established in 1983
- Authorized & Regulated by the FCA

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Forex BrokersReview

- #1 Broker in USA
- Canadians Welcome
- Over 80 Currencies
- Regulated by NFA, CFTC, FCA, FSA, IIROC & CIMA
- Member of the National Futures Association (NFA# 0339826)

Click Here to Visit Forex.com

- #1 Broker in UK
- Singapore Welcome
- Australia Welcome
- 12,000 + Global Markets
- Established in 1983
- Authorized & Regulated by the FCA

Click Here to Visit City Index