What is Forex?
The global, decentralized trading of currencies takes place on the foreign exchange market, sometimes known as the FX, currency market or FOREX. With the exception of weekends, financial centers across the world operate as the main aspects for trading between a wide range of types of buyers and sellers. The relative values of different currencies are decided by the foreign exchange market.
What is the size of the Foreign Exchange Market?
The foreign exchange market FOREX is the liquidest of all financial markets. Its daily turnover shows a constant and progressive growth, as reported by the Bank for Settlements’ 2010 Triennial Central Bank Survey – an impressive US$3.98 trillion in April 2010, as compared to $1.7 trillion just 12 years ago. Out of that colossal figure, $1.5 trillion was spot transactions, while the remaining $2.5 trillion was transacted in derivatives such as outright forwards and swaps.
Where is the Foreign Exchange Market based?
The currency market is not unified or centrally cleared, with very little cross-border regulation. Due to its over-the-counter (OTC) nature, it is made up of a network of interconnected marketplaces, with different currency instruments traded across them. This means that there is not a single exchange rate, but rather a range of different prices, determined by the bank or market maker, and its location.
Who engages in trading on the FOREX market?
The foreign exchange market is stratified in terms of access. At the peak stands the interbank market, made up of the largest commercial banks and securities dealers, which account for more than half of all transactions. Below that, transactions take place between smaller banks, and then by large multi-national corporations, big hedge funds, and even some retail market makers. In recent years, the influence of brokers, multinationals, registered dealers, and individual investors has been on the rise.
What is Leverage?
Forex Leverage, otherwise known as simply Leverage, is the percentage of a trade’s value you are able to borrow from your broker when you open a position. This percentage is referred to as the margin and is the amount of money needed to secure the trade. In simpler terms, Leverage is essentially a loan that allows you to purchase foreign currencies.
What is Margin?
In order to access leverage, Brokers will often require a predetermined amount of capital to be set aside for each position (lot) traded. Margin is the minimum amount needed to open a position, and is based on the leverage of the account. For instance, a leverage of 1:30 means you can leverage a position up to thirty times the size of the margin. To put it simply, margin is like a deposit for a loan (leverage). For example, with a leverage of 100:1 (or 1% of the position required), you can open a trade worth $100,000 with just $5,000 of equity. This is possible because the broker will hold back $1,000 as a down payment, or “margin”. Any profits or losses will then be deducted from, or added to, the remaining balance in your account.