Chapter 1 - Introduction to the Forex Market
What is the Forex Market?
From the linguistic perspective, the word “Forex” is not a word but an abbreviation and acronym, and it is not an Arabic word. Forex in English is an abbreviation for the term “Foreign Exchange”. It is the foreign exchange market, and it is a financial market in which the currency of one country is bought and sold in exchange for paying the currency of another country. For example, the US Dollar is bought by paying the single currency of the European Union (the Euro), or vice versa, i.e. the Euro is bought by paying the US Dollar in exchange.
In Arabic, the word forex has been localized, and it has become a synonym for the currency exchange. You will always find the word "Forex" the most prevalent, and during the explanation the words (Forex, currency market or currency exchange) will be used interchangeably because they all have the same meaning.
Profit is obtained by exploiting the slight differences between currency rates, which are simple differences most of the time, but they can turn into huge profits when buying and selling large amounts of money, or by maximizing the value of capital in order to exploit the slight differences between currency rates, and this is carried out through a particular type of economic contract in buying and selling that is called margin trading.
Markets (stock exchanges) in terms of their nature are divided into two types: -
Over the counter (OTC)
The difference is that exchanges are stock exchanges that have a specific central headquarters for which whoever wants to do business head in order to buy or sell, or by having a representative to buy and sell in his name, such as the New York Stock Exchange, which is located in New York City where the American companies shares are bought and sold.
As for stock exchanges that are established through communication networks, they are markets in which securities or commodities are bought and sold without having a specific central premises, rather sales and purchases are carried out between companies, banks and individuals through networks and computers.
The currency exchange is one of the exchanges that are based on dealing over communication networks, and when you start trading in buying and selling currencies on the international currency exchange, you will deal with this type of exchange, i.e. exchanges working through the communication network , particularly the Internet.
The international currency market is the largest financial market in the world, where all other financial markets are stunted there before. You will realize the magnitude of this market when you know that the volume of trading on the New York Stock Exchange, which is the largest stock exchange in the world, amounts to $ 25 billion per day, while on the currency exchange, an approximate amount of$ 5 trillion is traded daily !!!
Why is trading in the currency market better than trading in other money markets?
The currency market has unique characteristics that make it a very distinctive market and give all participants great benefits that they will not get outside the currency market, the most important of which are as follows:
- Working around the clock
- High liquidity
- Market fairness and transparency
- Market clarity and relative simplicity
- High duplication
- Taking advantage of the bullish and bearish market
- Making much benefit from the development of concepts on the Internet.
It is better to address these features in some detail so that the reader can realize more aspects of this market.
Working around the clock
Working hours seems an unfamiliar word in financial markets, but you will definitely encounter it when you want to trade in a financial market with daily limited working hours.
You should know that on the exchanges, work is done for a limited period each day, as the exchange opens in the morning and closes its doors in the evening.
For example, if you want to trade in the American companies shares, you can buy and sell only when the New York Stock Exchange opens its doors at 9:00 am (EST) until 4:00 pm at the same time.
This means that you are bound by this time limit to monitor the market, which requires full-time devotion, and this applies to all other exchanges, according to the timing of the country to which it is affiliated.
If you work in an Arab country, and you want to trade shares on the New York Stock Exchange, you are restricted to work between 4:00 pm to 11:00 pm, which corresponds to the timing of the New York Stock Exchange opening for most Arab countries.
Such a difference in working hours causes a lot of problems and difficulties on the long run.
As for the currency exchange, because there is no specific central headquarters, and since operations are carried out via computer networks, the work on the currency exchange continues around the clock, except on the last two days of the week (Saturday and Sunday), which means that work on the currency exchange continues for 24/ 5 a week.
Why does work continues in the currency market around the clock ?!
The continuity of banks and financial institutions work worldwide is the reason why the currency exchange continues to work around the clock. Every 24 hours, an Asian trading session passes, then a European trading session, followed by an American trading session, then an Australian trading session, then it starts all over again. It is worth noting that each trading session has distinct characteristics that distinguish it, as will be discussed later.
Banks and financial institutions open their doors in Japan at 12:00 GMT (8:00 am Japan time), so the buying and selling operations start and Japan's institutions are closed only at 9:00 am GMT (5:00 pm Japan time), but the work will not stop because once the Japanese and Asian institutions, the most important of which are located in Tokyo, Hong Kong, and Singapore are closed, the European institutions, the most important of which are located in London, Frankfurt, and Paris, open their doors, and likewise, once US institutions close their doors, institutions in Australia and New Zealand start trading, and before closing its doors, the Japanese institutions start a new day of work .. !!
Thus, according to the timing of each country, trading will continue around the clock.
Liquidity is the ability to convert your securities into cash.
We previously mentioned the magnitude of the currency market compared to the largest stock market in the world, as at a time when the volume of trading on the New York Stock Exchange in a single day is estimated at an amount of approximately $ 25 billion, the volume of currency trading per day is estimated at approximately $ 5 trillion. This ensures that currency traders can buy or sell currencies at any time and at any price levels, a feature that traders in other financial markets such as stock or commodity markets miss.
In some circumstances, when a news event occurs and causes a sharp decline in the value of the shares you own, all the holders of such shares that you have will want to sell them too, so the supply of shares becomes much more than the demand for them, and this shall cause a huge drop in the share price at a super fast speed, so in some circumstances you may find great difficulty in selling your shares at a reasonable price, you may even have to sell your shares at a great loss when you do not find someone willing to buy them.
Market fairness and transparency
The currency market is the fairest market in the world ... !!
Because it is a very huge market, and no limited group or entity can easily influence it.
For example, if you compare it to the stock market, if you own shares in a company, a simple statement from one of this company officials is enough to affect the price of the stock you own, up or down.
As for the currency market, and because it is a huge market, it cannot be influenced by an individual or a single entity, and currency prices are only affected by huge economic movements estimated in billions. It may only be influenced by official government statements, not from any country but from the largest economic countries, such as the United States, Japan, the European Union, or the statements of finance ministers and central banks of these countries.
This protects you from the manipulation “movements” from which many small stock holders often suffer , when carried out by company officials and major shareholders, who “may” have a personal interest in raising or lowering share prices, and many of these stories have occurred even in international companies shares in spite of tightened procedures and control.
The immensity of the currency market and its being affected only by the official statements of the largest economic countries in the world and the officials of these official countries make the currency market more transparent with neither secretsnor manipulation.
This saves the currency market traders from the many "hidden" bumps that dealers in other markets may face.
Market clarity and relative simplicity
In the currency markets, although there are dozens of currencies that can be traded, 80% of trading in the currency market is done on only four currencies, which are the Euro, the Japanese Yen, the British Pound, and the Swiss Franc, all against the US Dollar. If you want to expand, there are only 8 currencies that are of interest to traders, to which 95% of the transactions are limited, i.e., your options are limited, which makes it easier and more focused.
On the other hand, the process of registering with the brokerage firms, the procedures for opening an account, and the process of depositing funds, then starting to make transactions in the market are all very simple steps that cost the trades no time or effort, which makes this market more simple than all other money markets.
High duplication (Leverage)
Margin trading is the basis of trading in the currency market (we will later explain the margin system in detail), but here it suffices to indicate that in the currency market, you can start trading with only $ 100, i.e. you can invest any amount you want, and the margin system enables you to trade with values many times greater than your capital through what is called the leverage.
The percentage of the leverage granted by the brokerage companies varies according to the type of market and according to the company that will deal therewith, and the currency market has the highest duplication rate compared to other markets, which reaches up to 100 times; moreover, some companies grant a duplication rate up to 500 times for small accounts ... !!
It is the prevailing rate in the currency market today , and it is much greater than the duplication rate that you can get in other markets.
Taking advantage of the bullish and bearish market
In the currency market, you will find trading in the bullish and bearish trends. It is the same !!
The explanation for that is due to the fact that currency trading takes place in pairs (This point will be explained in detail later), and this means that when you buy the pair, you buy the base currency, and when you sell the pair, you buy the second currency, and therefore you can trade if the price of the pair is going upward or downward.
This matter needs more clarification as will be presented later, and here it is sufficient to confirm here that the advantage of trading in the bullish and bearish trends is one of the most important features of the currency exchange, which you will not be often found in many other financial markets.
For example, trading in the bearish stock market is characterized by complexity and frequent restrictions, which makes it a dangerous field, because countries and exchanges impose special systems for trading in the bearish stock market in fear that companies officials or stake holders may purposely attempt to lower stock prices for their own benefit, so there are a lot of restrictions that make trading stocks in the bearish market a complex issue that can be handled only by professional and knowledgeable people.
Making much benefit from the development of concepts on the Internet.
We have previously mentioned that the currency exchange is one of the decentralized exchanges that focuses on its work on communication networks and the Internet, so there are great changes in the tools of the currency market, where it develops as the concepts of the Internet evolve, including but not limited to: Trading through Social Trading Network, in line with the big boom brought about by social media, and the system of trading through social trading networks is based on linking your account as a trader to the account of a professional trader in exchange for receiving a specific return from your account, and in return, you may copy the deals you think appropriate from the risk account.
It is a feature that allows traders to increase their returns tremendously by increasing the number of their followers, as well as enabling the inexperienced traders to invest in the largest financial markets without focusing their attention on analysing the markets that need a large degree of knowledge and experience, which are foundations that are not available to many investors.
Consequently, we are witnessing the development of concepts that contribute significantly to the development of market tools to achieve greater benefit for customers, and to maximize the value of returns for traders and investors. Later, we will explain social trading networks in more detail, but here we just refer to it as an example.
What we have presented so far is the most important reasons that make the Forex market one of the best financial markets, which gives fair opportunities for investors to achieve excellent returns, but all of the above does not allow us to say trading in this market is easy, since trading in the currency market is a difficult task and needs a high degree of experience and skill that does not develops so soon.