According to some estimates, there are currently ten million forex traders today. Sure, most of these traders are commercial banks, hedge funds, retail traders, and sovereign wealth funds, but it’s not impossible for an individual investor to join this market.
Before getting involved in anything, you must figure out what you’re getting into. With that in mind and without further ado, here are the top nine things you didn’t know about the forex market.
1. No physical exchange
All currencies on forex are traded digitally, meaning there’s no physical exchange. The primary participants in the forex are large financial institutions that directly trade currencies through the interbank market.
This type of exchange is more convenient, accessible, and much easier for record keeping. These transactions are processed quickly and at reduced costs, which allows forex to run as successfully as it does.
According to some estimates, only eight percent of the world’s currency exists as physical cash. The rest exists in electronic form. Since the golden standard was abolished, currency’s value is based on the perception of value. This is why the world’s strongest currencies function within stable systems and sturdy economies.
2. 24/5 market
The forex market is available for 24 hours, five days a week. This means that it runs continuously from Monday to Friday and gives a trader a chance to interact with their assets many times during the work week. This is what enables day trading and makes the forex market so dynamic.
Since the majority of individual users of forex interact with the market via an app or a browser, all you need is the right smartphone or access to a computer to join a game. There’s also no minimal amount of money required. Sure, a broker you choose may have their requirements, but this can sometimes be as low as $1. The discrepancies here can be quite significant; some brokers may go as high as $100. Either way, while, in theory, you’re looking for a low entrance fee, in practice, you should focus on other factors more.
3. Some of the most traded currencies
On the forex exchange, people are trading currency pairs. The biggest ones usually have the highest liquidity and trading volumes and belong to some of the world’s strongest economies. For this reason, some of the most traded currency pairs are:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
There are many reasons why these pairs are considered a haven for forex trading. First of all, they have a particularly high liquidity. With so many buyers and sellers, it’s easy for any trader to enter and leave a position without causing a huge price slippage.
Second, each of these currencies has a major global significance and economic impact on the world. This is why all major economic institutions widely accept and protect them.
4. Pip
The difference between a currency’s bid and ask prices is expressed in pips.
A pip is an abbreviation for either “percentage in point” or “price interest point.” While no one can settle on the exact etymology, both definitions serve the same purpose in practice. A pip is a standardized unit of measurement for the price movement in the currency pair. By definition, it’s the smallest observable difference and is used to express exchange rate changes within a currency pair.
Now, while pips are supposed to be the smallest, some brokers are offering fractional pips to become even more competitive. Still, this only appeals to the largest forex traders since they can only capitalize on such a minor market movement.
5. No commissions (making money through spreads)
When looking to find the most trusted brokers, you need to have a reference point. First, you need to understand that most forex brokers don’t charge for commissions. They’re making money through spreads.
Now, spreads can be fixed or variable. With variable spreads, there’s a difference between the bid price and the asking price. This difference goes to the brokers.
You should also understand that not all brokers are as forthcoming about all of this. What you’re looking for are brokers with a high level of transparency. You want someone who discloses information about average spreads, trading costs, and trading conditions.
6. Decentralized but influenced by central banks
There is no such thing as a physical market or even a singular forex exchange where all the trading occurs. In reality, foreign exchange is a decentralized market, but it’s also a market that’s heavily relying on major financial institutions (primarily banks).
The coordination between different markets (Asian, European, and North American sessions) makes trading activities available at any time of the day. Due to time zone differences, even during Sunday evening, you can encounter the “so-called” Sunday open (because the Asian session has already begun). A similar thing goes for Friday afternoon, only this time with the late-closing North American session.
7. Market sentiment
Since the forex market is decentralized, no central authority will dictate the price. This means that the values on the market are affected by the collective psychology of traders. Since there’s no longer a golden standard, any currency’s worth is based on the collective consensus of the traders (participants in the market).
This is why it’s so important to track market sentiment. If people trading in GBP believe that the British economy is going down, the value of GBP, relative to other currencies, will go down. This impacts the volatility, but it’s sometimes hard to establish a direct correlation between an event and the cost drop. Still, making this effort is necessary for a serious forex trader.
8. Affected by geopolitical occurrences
Major geopolitical occurrences affect currencies more than you know it. Just take some of these events as an example:
- GBP dropped in value immediately after BREXIT.
- USD dropped significantly immediately after the results of the 2016 elections.
- RUB fell drastically after the war in Ukraine started.
All three of these events have in common that the currency eventually stabilized and returned to its pre-event state. This means it was fairly easy to buy low and sell high (or, at least, higher) if you just paid attention to the market trends. Still, this type of geo-political and economic analysis is far from certain.
9. Unusually high leverage
There are many reasons why forex trading usually involves high leverage. First of all, forex is probably one of the most liquid markets in the world. This means that everyone can enter and exit quickly. By default, this evens out the risk that comes with high leverage.
Second, the forex market has particularly low transaction costs. There’s an absence of commissions and exchange fees, so brokers find it relatively easy to offer high leverage to attract traders.
While currency pairs consistently shift in dynamics, the shifts are usually insignificant. This is why traders often resort to leverage to increase their exposure.
Just bear in mind that high leverage isn’t always a good thing. Sure, it amplifies your gains, but it also increases your loss. It’s also a lot easier to get involved in overtrading.
The Forex market is global, decentralized, and potentially, very lucrative
As you can see, the forex market is more complex than you thought. However, to make money on it, you don’t have to know all its functions’ peculiarities. It’s enough to find a credible broker (brokerage app) and familiarize yourself with the factors affecting your preferred currency pair. This, alongside basic market sentiment monitoring, can already do so much.