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An Introduction to Forex Market

The Forex market is an innovative solution for modern-day investments. As an extremely fast-moving giant market with a daily turnover of trillions of dollars, the Forex market seems to be the utopia for profitable investments.

Although everything seems to be perfect in theory, some people fail and go bankrupt in the Forex Market because they “gamble” their capital.

The reason why this happens is that they bet their money without sufficient trading knowledge and education. They think they can gamble their way to the top only by clicking some buttons. So, the more they push their luck, the more money they lose.
Now, if you are one of these people, you need to stop right now, in that taking another step into the Forex Market without adequate knowledge is a complete suicide.

Take a short break and continue reading this article because it will help you understand Forex trading better by providing you with a detailed account of what the Forex market is all about and more.
Forex introduction

What is Forex?

Forex stands for Foreign Exchange. It is the biggest financial market that determines the price and exchange rate of every currency in the world. In this market, people buy and sell currencies as an asset, by the means of exchanging them for one another.

The Foreign Exchange Market, unlike other financial markets, does not have a particular location for all the financial transactions. That is because the Forex market is not a place or a building. Instead, it is a stream of networks formed by all of its participants, namely the liquidity providers such as banks and financial institutions, as well as brokers and retail traders.
Forex Market
Most financial transactions in the Forex market are done using the OTC system, or over-the-counter, which means that the buyers and sellers will conduct their transactions directly in the market without any supervision from an exchange or a liquidity provider.
forex market networks
Furthermore, since the Forex market is essentially a system that involves different parties from various nations, it is a market that seldom sleeps. From the United States and Europe to Asia, you can find any market open at any time on weekdays as long as the sun is in the sky.
forex market 24 hours
Now that you have a little bit of understanding about the Forex Market, can you imagine how vast this market is and how much potential profits can be offered by this massive network?

The Forex market is currently considered the largest financial market in the world, with a daily turnover of over 5 trillion USD. Moreover, the myriads of participants make the market both highly liquid and highly volatile. That is why you need to completely understand the factors and circumstances that move the market. That way, you will know how to formulate the best strategies and make the best decisions for your daily trades.

What Moves the Forex Market?

Over the years, countless new traders folded and gave up their journey in the Forex market for many reasons, such as lack of progress, an insufficient amount of capital, and encountering scammers.

These incidents are quite unfortunate, but they can be easily avoided if you get a basic understanding of how the Forex market moves and what factors contribute to its directions.

In reality, there are countless situations and factors that affect the Forex market movements, but you can start with the following aspects:

1. Supply and Demand

When it comes to trading and business, the basic economic principle, i.e., supply and demand, plays a pivotal role. The comparison of supply and demand will always determine the value of an asset.

When the number of demands is larger than the available supply, then the value of the asset will increase.
Forex demand supply
On the other hand, when the available supply is higher than the demands in the market, then the value of the asset will decrease.
Forex supply demand
Let’s assume, under normal circumstances, the price of a certain medicine is around 3 USD. However, when there is a sudden epidemic, that medicine becomes an immediate need. Everyone wants it, and some people even buy the medicine in bulks because they are afraid that they will run out of supplies. Therefore, because the demand for the medicine is exceptionally high, the number of medicine available in the market becomes limited, increasing the price to over 6 USD.

Now, after the epidemic is over, some people might still need the medicine, but the total demand decreases because people are not so eager to buy them anymore. Yet, shops may still have a lot of remaining supplies from the epidemic. In this case, the price of medicine will probably decrease to around 2.8 USD.

The same thing happens with currency trading. When the demand for one currency increases, then the price of that particular currency will go up due to its perceived value. But if the supply of the currency is higher than the demand, then the currency price will go down.
forex price supply demand
2. Perception of Value

It may be easier to count the supply and demand of other assets. But with the currency market, you cannot determine how much of one currency is available in the market. Even though many aspects determine the supply and demand of a currency, the perceived value of the currency remains among the most critical elements.

As you know, in the Forex market, currencies are always quoted in pairs. It means that the value of one currency will always be measured based on another currency. At the moment, the USD is the most popular currency and used as a comparative measurement because of its dominance in the international market.
forex currency pair
The price of a currency changes when the market’s relative value of that particular currency is changing as well.

For example, in a particular market, the value of 10 apples is equal to 1 banana. So if you pay with one banana, you get 10 apples in return.
example 1
Out of the blue, John Hopkins University publishes medical research claiming that apples contain a crucial element that can highly boost your immune system.

As a result, everybody is now talking about how great apples are, and they want to buy more.
example 2
In this case, we can say that the perceived value of apples increased, so if you pay with 1 banana, you can no longer get 10 apples. You probably get only 5 or 6 apples.
example 3
The same thing applies to currency pairs. If the market’s relative value of a particular currency is positive, it will increase the currency price. At the same time, if the currency’s perceived value is negative, then the price of the currency will drop.

3. Economic Events and Announcements

So, how do you determine the perceived value of a particular currency pair? By constantly monitoring any information and news regarding that specific currency.
A country’s economic news and announcements, such as the Gross Domestic Product (GDP), employment rate, retail sales, and consumer price index will highly determine the price of its currency.

When a country’s economy is in good condition, it will increase the perceived value of its currency. As a result, the demand for the currency will increase, and the price will rise.

4. Central Bank Policies and Interest Rates

Aside from the economic events and announcements, there is also the Central Banks that play huge roles in determining how the Forex market moves. Depending on how the events/announcements affect a country’s economy, Central Banks will revise and change their policies to create an equilibrium.

There are many different actions a Central Bank can take, and these actions can have different effects on the value of a currency. Still, the key actions are usually related to adjusting the interest rates according to the country’s economic situation, as well as performing an intervention when the price of the currency increases/decreases in a way that it affects the country’s economy.

5. Traders’ Sentiment

Some people may consider it trivial, but traders’ sentiments can also affect the price of a currency.
Let’s say a group of traders sell the same currency at the same time in an amount so huge that it becomes noticeable for other traders. This will create a chain reaction, resulting in more traders selling the same currencies even when nothing is really happening.
Forex sell
Cases like this will only last for a short period because the above factors will usually counter the effect. Still, in that short time, the price of the currency will fall, thereby affecting other traders and the country’s economy.

Forex Market Participants

The Foreign Exchange market is decentralized. It is a stream of networks formed by various players who play their unique roles in the market.

To survive and thrive in the Forex business, first of all, you have to know the different players you that will face in the market. If you understand their roles and motives, you’d a have better perspective on their actions and behavior in the market. This will allow you to anticipate their next moves so you can formulate better strategies and make better trading decisions.

Who are Forex Participants?

On a higher level, you have the interbank market where the big players communicate and conduct financial transactions. These players decide the value of a currency. So, whatever course of action they take will cause quite a stir in the market.
forex market participants
On a lower level, there is the Retail market, dominated by individual players such as investors, tourists, and retail traders. The amount traded by these individuals might have a lesser effect compared to those in the interbank market; however, the perception of value by these retailers will affect the direction of currencies, due to their growing number.
forex market traders
There are many different participants involved in the massive Forex market, but the major ones who influence the movements of a currency in the market are as follows:

1. Central Banks

By definition, a Central Bank is a financial institution that is responsible for the production and distribution of money and credits in the country. Sometimes, the tasks are extended to several countries, but they are mainly responsible for managing the country’s currency and maintaining the economy.

A Central Bank is usually a non-competitive bank. Some central banks are nationalized, while others claim to be politically independent. Central Banks need to remain independent because of their legal monopoly status which gives them the right to issue banknotes and cash. A right that is absolute and is protected by the law.

Central Banks play a huge role in the Forex market due to their special privilege. These banks can take many different actions which would affect the Forex market in different ways.

Furthermore, Central Banks usually adjust their interest rates based on the country’s economy. Increased interest rates will raise the value of a currency in most cases; however, a decreased interest rate will lower the currency price since it is indicative of a failing economy.
forex interest rates
Central Banks can also directly intervene in the market when it is needed. For example, the skyrocketing price of a currency can inflict harm on countries that depend on their exports because their selling prices will be higher.

When such cases happen, Central Banks will step in and produce more money to increase the supply. That way, the value of the currency will decline because the available supply increases, even though the demand for the currency in the market is high.

2. Commercial Banks

The second biggest players are Commercial Banks. These banks hold the greatest volumes of traded currencies either on behalf of their clients (individuals or corporations) or themselves.

Another reason why they play a special role in the Forex market is that they operate on two different levels.

The first level is the Interbank Market, where they buy, sell, trade, and exchange currencies with other commercial banks through electronic networks. Whenever a bank buys currency in the Forex market, it means that they are selling another currency at the same time. Plus, they are selling/buying in bulks. So, you can imagine how much currencies these banks are moving every day.

The second level is the Retail Market, where these banks act as the facilitators for corporations, retail clients, exporters, or individual investors. They offer credits and determine the exchange rates of currencies for people who want to buy/sell/trade/exchange through their network.
forex retail traders
In addition, a country can have hundreds of these commercial banks that play such important roles. So, commercial banks dominate the Foreign Exchange market in terms of both numbers and amounts.

2. Foreign Exchange Brokers

Due to its vast and decentralized network, you can benefit from the Forex market after joining with a significant amount of capital. Moreover, the Forex market has its own electronic network system that can only be accessed by selected parties. That is why, when it comes to Forex trading, it is almost impossible for traders to join the Forex market by themselves.

That’s where the Forex Brokers come in.

Foreign Exchange Brokers are agents and mediators who serve and facilitate individual traders. Forex brokers give these traders direct access to the Forex market. In exchange, they charge a certain amount of fee, which is usually is included in the spread.

Unlike commercial banks, Forex brokers do not put their own money at risk. Some brokers (Market Makers) do trade and exchange with their clients. However, in most cases, they do not go out in the Forex market and buy/sell a bunch of currencies.

Instead, Forex brokers actively and constantly monitor the exchange rates from different major international banks through computerized systems. And then, they immediately and anonymously find an opposite trading party for their clients.

This is why Forex brokers play a big role in the Forex market. They match trading positions with one another and execute them as fast as their system allows them to.
forex buy and sell
4. Investment Managers and Hedge Funds

The investment managers and Hedge Funds also play important roles in the Forex market. These large investors constantly and actively access the Forex market to buy or sell currencies for various purposes, such as pension funds, foundation, endowments, as well as funding cross-border investments.

What’s more, these two groups are usually involved in Forex trading each with their own objectives. Investment managers speculate on foreign securities, whereas Hedge Funds engage in speculative trading as a form of investment strategy.

5. Multinational Corporations

The next significant players are the Multinational Corporations. These companies are involved in the import and export of their goods and will engage in Forex transactions to pay for the rendered services.

For example, a toy company needs to pay its Japanese supplier in JPY, and USD to another company for transporting their products overseas.

Some companies trade Forex just to avoid the risks associated with that currency. In the toy company example, they might buy the JPY when the price is going down to reduce the risks of foreign currency.

6. Retail Investors

Last but not least are the retail investors, such as individual traders, tourists/travelers, small businesses, and even patients who are getting their treatments abroad.
In most cases, these retail investors participate in the Forex market out of necessity. The amount of currencies held by retail investors is considered extremely low compared to that of other participants like commercial banks or multinational corporations.

However, the number of retail investors, especially retail traders, is increasing rapidly. The rising number of retail investors results in trading movements that may affect the perceived value of the traded currencies in the market. Therefore, their percentage of involvement in the Forex Market should not be underestimated.
Forex trades