What is the foreign exchange market (Forex)?

So what is the foreign exchange market (FOREX) anyway? It’s something I’ve never really tried myself, but it’s a really interesting concept and might be fun to try out if you like the game. Also, there are a whole bunch of automated forex robots that many people claim work. We might even try one out on this blog and give live updates!

So, back to the subject at hand. There are many different markets available to the modern investor. Thanks to the proliferation of the internet, information can be exchanged in the blink of an eye with anyone all across the globe. That ability has led to an incredible growth the foreign exchange market over the last decade – to the point when the foreign exchange market is now the largest marketplace in the world.

What is the Foreign Exchange Market?

This is a tricky question because, technically speaking, the foreign exchange market doesn’t physically exist. Unlike an exchange like the NASDAQ, which has a physical location and hours of operation, the foreign exchange market is open 24 hours a day (during weekdays) and business is conducted through a network of banks, corporations, and individuals trading with one another. These trades are facilitated through brokers who do all of their business online.

The commodity being traded over the foreign exchange market is the currencies of different countries. Investors are simply trading the ownership of one amount a certain currency for an amount of a different currency. Because the currency’s value is often tied to the welfare of the country, politics and world events have a major role in the action that takes place on the foreign exchange market.

The digital existence of the foreign exchange market offers some advantages and disadvantages as compared to a traditional exchange. Let’s look at a few of the pros and cons.

Pro – Always Open

Now that news and business information is transmitted around the globe the very second that it happens, investors want to be able to react faster to what they have learned. In this area, the foreign exchange market is great. Since the exchange is open for business around the clock Monday – Friday, you can do your trading whenever it is convenient and whenever you learn of something that causes you to want to act. No more waiting for the market to open in the morning to make a move – it is always active and trades happen nearly instantly.

Con – Low Level of Regulation

While loose regulations can be a good thing in terms of trading freedom, it also can open you up to increased risk. All trades are done in what is called an ‘over-the-counter’ fashion. That means that there is no central exchange to run the trade through – it is just facilitated between the brokers of the two parties making the exchange. This method can lead to pricing inconsistencies as well as a lack of researchable information. For example, you might not be able to get accurate numbers on the trading volume of certain currencies – numbers that are widely available for stocks on more traditional exchanges.

Pro – Sheer Size

One of the best things about using the foreign exchange market as a mode of investment is simply the size of the market itself. An investor can run into trouble on smaller exchanges when wanting to buy or sell at a certain price. If there is not a buyer or seller to make a deal with at that time, the order will go unfilled. That is not really a concern with the foreign exchange market. Thanks to the incredible volume of trades that are executed each day, you are almost sure to able to find a trading partner for your order, and orders are usually filled right away. The size of the market also insulates it from being too strongly influenced by one entity. Even a large bank will not affect the prices on the market for very long.

Con – Risky Brokers

To go along with the point above regarding the low level of regulation in the foreign exchange market, there is also some risk associated with the broker you choose to do business through. There are plentiful broker options to be found online, but you need to do careful research before giving any of them your money. If your broker goes out of business for some reason, you likely will have no legal recourse and be out the money that you had invested. That is not to say that there aren’t reputable brokers out there that you can do business with – just to your homework first.

Getting into the foreign exchange market can be an exciting opportunity, but it takes some time and expertise to become proficient with. It is important to understand that this market is more of an active investment as opposed to a passive one. It is not generally considered good practice to invest in the foreign exchange market and simply let your money sit. The market is usually too volatile for that to be a sound investment strategy. Most investors in the foreign exchange market use it as a way to buy and sell quickly based on a number of different factors. There are other, more stable markets available to investors who wish to take a more passive approach.

One other warning when it comes to the foreign exchange market is the opportunity to invest on leverage. Using leverage allows you to trade with more money than you actually have put into your account, opening yourself up to potentially large losses if the investment is not successful. Using leverage to make high-volume trades on the foreign exchange market is a bigger gamble than many other types of investments, and should be considered carefully.

Of course, you do not have to use leverage to buy and sell on the foreign exchange market. You can simply trade in a volume that you have in your account, and you will not be exposed to any additional risk beyond the money you have already invested. As with any kind of investment, there is a risk/reward balance to be considered. Trading on leverage opens up a much larger potential for gains, and also exposes the investor to more risk. Ultimately, the decision on how to trade the foreign exchange market is yours based on the goals you have and the strategies you wish to employ.

Summary

The foreign exchange market is the largest in the world and is open 24 hours a day during the work week. Investors are able to buy and sell amounts of currency in an open market that has no centralized exchange center. If you are considering entering the foreign exchange market, it is a good idea to educate yourself first on the basics of how the exchange works, specifically the terminology and types of trades available. Also, doing careful research into any broker you choose to deal with will help keep your money safe. The foreign exchange market can be a viable option for investors looking for an active trading platform that often changes quickly to reflect the activity of the world as a whole.