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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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Forex Market Boosted by Record US Jobs Data

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Forex Market Boosted by Record US Jobs Data
  • Payroll Data Smashes Expectation for June
  • USD/JPY Increases on Optimism
  • Asian Markets also Open Strong on Friday

US markets received an unexpected but welcome boost on Thursday. The release of nonfarm payroll numbers showed that the economy added a huge number of additional jobs beyond expectation. Unemployment numbers also fell. The positive ripple from this has been felt in the forex market around the world with early trading in Asia showing the Japanese Yen up slightly, and a positive start to the day in China, where PMIs came in strong, and other parts of Asia.

Largest Single Month Job Gain in US History

The numbers reported yesterday in terms of US nonfarm payrolls have easily eclipsed previous highs in terms of being the largest single month job gain the country has ever seen. Analysts had forecast a still impressive gain of 2.9 million jobs added, though the actual number came in much greater at 4.8m. This was quickly heralded by President Trump as a sign of the “economy roaring back”. Wall Street also reacted positively on the back of the news, with the Dow Jones rising more than 400 points.

The Labor Department also confirmed that unemployment had fallen more than expected, to a number of 11.1%. This is the lowest since the coronavirus pandemic started. Though these numbers may not paint an entirely accurate picture since they fail to capture the period when states started to rollback their reopening measures, they have still provided a timely economic boost.

JPY Moves Slightly Higher but Remains Hampered

The USD/JPY is one of the most traded markets in the world. Forex brokers though have noted that the market has been trading without much direction for some time. The pair was boosted slightly to a high of just below 108 on news that the US jobs data had come in much better than expected. This positive move was tempered with caution though amid the increasing concern with COVID-19 cases increasing across many American states.

As a well-known safe haven currency in times of difficulty itself, it may be some time before those forex trading the Yen feel like moving out of that safety zone. Later today, Japan will publish their own bank services PMIs from June. Should this number come in greater than expected, it may provoke an additional boost in the market.

Chinese and Other Asian Markets Positive

Yesterday’s positive news from the US has extended into the Asian trading session on Friday. Markets opened strongly across the Asia Pacific region. The Shanghai Composite index jumped almost 1.5% in early trading, with major indices in Japan, South Korea, and Australia, also displaying positive signs.

Markets were further buoyed by the release of Chinese PMI data from the services sector which showed a number of 58.4 for June. This would indicate the sector is growing at the fastest rate since 2010 after much of China returned to normal activity in the month of June.

 

 

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What are Carry Trades in Forex?

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What are Carry Trades in Forex?

As you continue increasing your knowledge about forex trading and the market in general, more and more new concepts and ideas will pop up. This includes a growing range of trading technique and strategies. One such trading strategy which has been around for a very long time in the industry, is the carry trade. Here we will take a closer look at exactly what a carry is in forex, and provide all the information you need to decide if carry trading is a good strategy for you as you move forward on your trading journey.

The Basics of How a Carry Trade Works

In its most simple form, a carry trade in forex, is borrowing one currency, and using it to buy another. For example, you may borrow (sell) $100,000 Australian Dollars, and use those funds to purchase the same amount of JPY. Placing a carry trade is one of the most popular trading strategies in the entire sector, and used by many traders to benefit from the position of currencies around the world.

So, what is the benefit in borrowing one currency and using it to buy another? This comes from the difference in interest rates between the two currencies. Let’s look again at our example in more detail.

Presuming the interest rate on the Australian Dollar was 4%, and the interest rate on the JPY was 0.1%, a carry trade would be where you buy the AUD/JPY market, as here, what you are effectively doing is selling (borrowing) Japanese Yen, to purchase Australian Dollars. In the most simple of ways, you will now have placed a carry trade. Here you will earn 4% interest on the Australian Dollars you are holding, while paying 0.1% interest on the Japanese Yen you have borrowed. This should leave you in a profitable position if the rate does not change, and is known as a positive carry trade at +3.9%.

Why is Carry Trading in Forex So Popular?

From an outside perspective, even looking at our hypothetical example where there is quite a gap between the interest rates, you may wonder why placing carry trades is so popular when the potential profit may seem quite small. There are two main elements at play in the forex market though which make this a very attractive type of trading strategy.

Currency Pairs: The fact that currencies are traded in pairs make a carry trade very accessible, and convenient for all traders. The difference in interest rates has never been so easy to take advantage of as it is in forex trading, where you can directly trade low and high interest currencies in pairs.

Leverage: The availability of extensive leverage in forex makes it the ideal place to carry trade. Many forex brokers can make leverage of up to 500:1 available on certain currency pairs. This basically means that even a relatively small deposit of $1,000 can open up huge buying power of $100,000 at 100:1 leverage, or more. Dealing with such large numbers, even low percentage profits are very meaningful.

Popular Forex Pairs to Carry Trade

Given the fundamentals of how a carry trade works, borrowing a low interest currency, to buy a high interest currency, then this is precisely what traders are on the lookout for in the forex market when it comes to placing a carry trade. There are a couple of currencies in particular that are most popular in this regard.

As a selling currency, the Japanese Yen is always a very popular choice. This is thanks to the historically very low cost of borrowing in Japan. The country has not had an interest rate of above 0.5% in more than 20-years. Another popular choice as a selling currency may be the Swiss Franc (CHF).

On the buying side, popular choices include both the Australian, and New Zealand Dollar as countries which typically hold slightly higher interest rates, yet are recognized as quite stable currencies.

Benefits of a Carry Trade

A carry trade in forex can be an excellent long-term investment strategy. You will have the potential to benefit from a carry trade even if the rates do not change at all thanks to the difference in interest rates. This makes it perfect for an investor who intends to hold the position for a long time.

Added to that, if the rate does change in your favor, then you can potentially have a sizable profit when added to the interest rate difference, and factoring in the leverage used. The fact that many brokers nowadays also cater for trading with very competitive fees and low spreads also plays to your advantage if placing a carry trade, and is something that many look out for.

Risks Involved in a Carry Trade

With every form of trading, there is always a certain element of risk. With a carry trade, though it is seen as a low-risk strategy, there are still a couple of things to be mindful of.

The market can still move against you. A change in the market can certainly negate any benefits you have gained from the positive interest rate difference. Particularly if you decide to trade in minor, or exotic currency pairs which are less common, you should note that these markets can be highly volatile, and subject to change in a very swift fashion. Some examples include trading with the MXN (Mexican Peso), or NGN (Nigerian Naira). Both may appear attractive for a carry trade, but can be subject to intense volatility. This risk can be amplified even further if you are trading with a lot of leverage.

You should also remember that, just because there may be a positive rate difference at the moment, the monetary policy in every country is subject to change at different times. The perfect example of this would be right now, in the midst of the coronavirus pandemic, many nations have moved to cut interest rates. This has the possibility to really change the dynamics of your carry trade.

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Forex Market Majors Trading Lower Amid Coronavirus Concerns

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Forex Market Majors Trading Lower Amid Coronavirus Concerns
  • GBP/USD Struggling after GDP Dip
  • EUR/USD Also Sluggish as States Halt Reopening
  • Markets Await Key Testimonies After Monday Surge

Major currencies in the forex market are trading slightly lower today. Both the Euro, and Pound have dropped back against the Dollar as concerns over a spike in Coronavirus numbers persist. The final UK GDP figures for the first quarter released today, were also worse than expected. Meanwhile, US markets are looking quiet after a strong rally to open up the week on Monday. This may change as the day progresses and today’s testimony from the Fed Chairman is digested.

UK Suffers Biggest Quarterly GDP Decline Since 1979

Forex trading in the GBP/USD market today was struggling below the 1.23 mark for a number of reasons. One of the major points which seems to have rocked trader confidence in Sterling is the release of GDP figures for the first quarter today. These show a 2.2% drop in GDP, worse than had been expected.

This GDP drop is the largest the nation has seen in more than 40 years. It is compounded by the fact that a double digit drop is expected in the next quarter, and also the fact that a new spike in cases has led to local lockdown in at least one British city. British leader Boris Johnson is due to speak later today where he will introduce plans to inject more than £5 billion into infrastructure in a bid to bolster the economy.

Euro Also Drops Back as Virus Concerns Persist

The EUR/USD is looking to end the quarter in successful territory today although that has been threatened by negative pressure which has pushed the pair down at the beginning of the day. Forex brokers noted that traders are appearing to favor a move back toward the safety of the US Dollar.

This move has largely been led by the uncertainty of the US economic situation as several states have now moved to impose renewed restrictions, or halted their reopening plans as cases of COVID-19 continue to rise again in many areas. This has been the case in New York who have slowed reopening, as well as in Texas and Florida where renewed closures have been put in place on many bars and restaurants after cases in those states showed a heavy increase.

Market Opening Appears Quiet as Traders Await Testimony

Today’s market opening on Wall Street would appear to have hit a lull following yesterday’s great surge to begin the week. The Dow Jones rose more than 500 points yesterday to get the week off to a very positive start. The picture today, pre-market numbers have indicated, is much less active. Many could be awaiting the remarks of Federal Reserve Chairman Jerome Powell, who will address the House Financial Services Committee later today.

These remarks are expected to raise more questions than answers though, with Powell set to comment that the path forward remains very uncertain, and reliant on successfully containing the virus.

 

 

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