What is Forex and How It Differs from Other Markets
Welcome to the forex section, where we explore the world of FOREX. We’ll start with the basics and gradually delve deeper, ensuring you gain comprehensive knowledge of forex trading. This lesson focuses on defining forex and comparing it to other markets.
What is Forex?
Forex, or FOReign EXchange, is a decentralised global market where currencies are traded. As an over-the-counter (OTC) market, forex operates without a centralised exchange, allowing trading 24 hours a day, five days a week. It is the largest and most liquid market globally, with a daily trading volume exceeding $6.6 trillion (2019 data).
In forex, trades involve two currencies, betting on the value of one against another. For example, in the EUR/USD pair, the euro is the base currency, and the US dollar is the quoted currency. A rate of 1.12 means one euro equals one dollar and twelve cents. Trades can vary in duration, from minutes to months.
Forex vs. Other Markets
Forex Compared to Stocks
- Fees: Forex trading typically incurs low fees, as brokers earn from tight spreads. Swaps may add costs for holding positions overnight but can also provide payments for holding trades.
- Trading Hours: Forex operates 24/5, unlike stocks, which are limited to exchange hours. This offers greater flexibility for traders.
- Immediate Execution: Forex trades usually execute at displayed prices, whereas stock trades, especially for less liquid companies, may face execution challenges.
- Market Restrictions: Forex has fewer trading restrictions compared to stocks, allowing more freedom for traders.
- Market Manipulation: Due to its massive volume, Forex is less susceptible to manipulation compared to stocks, where schemes like pump and dump are more common.
- Number of Products: Forex offers a focused selection of 28 major and cross currency pairs, compared to thousands of stocks, helping traders maintain focus.
Forex Compared to Futures
- Liquidity and Trading Hours: Forex’s 24-hour trading and high liquidity surpass futures markets.
- Fees and Expiration: Forex offers lower fees and no expiration, unlike futures.
- Access to Markets: Forex brokers provide access to futures-like products through CFDs, allowing participation in markets like S&P 500, crude oil, and gold.
- Transparency: Futures markets offer real trading volume data due to their centralised nature, a transparency advantage over Forex.
- Account Requirements: Forex accounts can start with as little as $100, offering flexibility in position sizing compared to futures.
