New to Forex
Forex and ‘FX’ are shortened terms used for ‘foreign exchange’. The forex market is available 24 hours a day, five days a week,where currencies of nations are traded, typically via brokers. It’s the largest financial market in the world. Its daily average turnover is approximately US$4 trillion.
Forex is the conversion of one country’s currency into that of another.The value of one country’s currency is constantly changing against the value of another country’s currency. In other words, the world’s currencies are on a floating exchange rate and always traded in pairs. For example Euro/Dollar.
Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.
At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges. However, this arrangement works exceedingly well in practice, because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm. In the UK, brokers are regulated by the FCA, the Financial Conduct Authority.
Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.