For those who are new to the world of trading and wish to approach the Forex Over the Counter market, it's essential to have knowledge of the main technical notions that revolve around the fabulous world of online trading.
For this reason, this guide sets out from A to Z the notions and terminology related to the world of Forex.
Are you ready to start this journey? Great, then keep reading and learning.
Forex OTC Market: What Is It?
For novice traders and investors with consolidated professional experience, it's absolutely important to understand the notion and functioning of Forex.
Forex is an acronym for Foreign Exchange Market: it's a decentralized international financial market where supply and demand from investors meet and where currency exchanges take place.
There is no central authority or bank that oversees its operation, but exchanges occur directly between parties, between buyers and sellers in an absolutely transparent and secure manner, without any brokerage fees being applied.
In fact, the Forex market is a highly liquid "virtual" space where quotations are determined by currency exchanges that take place daily, which is why it's highly volatile, and the value of assets changes continuously and fluctuates more than the trend of global stock markets.
It's an over-the-counter (OTC) market, meaning an unregulated spatial place where financial assets are traded outside of official stock markets. Negotiations take place in a completely informal manner, through bilateral conversations between parties (supply and demand), electronically, and contracts between parties are not standardized.
It's worth debunking a false myth here: Forex is not a market for mere financial speculation, as the purpose is to exchange currencies transparently.
The financial transactions that are concluded every day on Forex exceed a volume of exchanges greater than 5 trillion dollars, in a non-stop mode, and can take place 24 hours a day and five days a week, without time and geographical constraints.
The success of the smooth functioning of the Forex market is largely due to the presence of a global interbank network, distributed across four main trading centers (New York, London, Tokyo, and Sydney).
The Hierarchy of the Forex Market: Who Trades Forex?
In dealing with the functioning of the Forex Market, it is worth noting that a wide audience of different intermediaries and investors in the financial markets gravitate toward this "virtual" place.
The list of who does Forex Trading is truly endless: Central Banks, financial and credit institutions (including large groups), companies operating in import/export, SIMs, SGRs, Hedge Funds, institutional investors, private (retail) investors, and Forex Brokers.
It's well understood that these are also subjects who do not have merely speculative interests: all transactions concluded on Forex influence the determination of prices, or the quotations of the assets being bought and sold.
However, there is no denying that Central Banks, large investment companies, large international banking groups, and Hedge Funds are the main players that have a determining role in the number and value of financial transactions that are concluded on this OTC market.
Even if the Central Banks do not preside over its functioning, they intervene with the influx of large capital with the ultimate aim of influencing the appreciation and depreciation of legal currencies, pursuing monetary policy objectives.
Forex Market: How Are Quotations Determined?
As emphasized above, it should be noted that the quotation of each currency pair that is exchanged on Forex is given by the average of the prices at which these are bought and sold at a given moment.
For this reason, pricing fluctuations are the order of the day, and the price of a given exchange rate at each broker trader is almost always similar to that practiced by the competition, net of the spread (differential) applied between the purchase and sale price for each pair of assets.
In fact, when trading a currency pair, there is a bid price (Bid) and an ask price (Ask). Think, for example, of a currency pair such as USD/CHF, the first is called the base currency, while the second represents the quote currency. What it means to go short and long in forex trading builds directly on this base and quote relationship.
In the exchange of assets, one must control how much quote currency is needed to purchase one unit of base currency.
On Forex, the purchase and sale of currencies are always contextual and simultaneous. A worked example of one market, with its levels, positioning and volatility side by side, is published on the EUR/USD analysis page.
When Is the Forex Market Open?
As already anticipated, the Forex Market is open 24 hours a day, except Saturdays, Sundays, and holidays. This is precisely why it is one of the most popular markets in the world, and open positions can remain active even during Saturday and Sunday nights. Which sessions carry scheduled macro releases in a given week can be checked on the forex economic calendar.
Forex Opening/Closing Hours
Frankfurt (Germany) - Opening Italian time: 08:00 AM / Closing Italian time: 04:00 PM
Tokyo (Japan) - Opening Italian time: 01:00 AM / Closing Italian time: 09:00 AM
New York (United States) - Opening Italian time: 02:00 PM / Closing Italian time: 10:00 PM
London (Great Britain) - Opening Italian time: 09:00 AM / Closing Italian time: 05:00 PM
Sydney (Australia) - Opening Italian time: 12:00 AM / Closing Italian time: 08:00 AM
Forex: Traders' Opinions
Those who buy and sell currency pairs every day often describe Forex as unusually accessible: all investors, even private ones, can reach this highly liquid market, and can use tools and information for free or at increasingly affordable prices, which until a few years ago were reserved for institutional investors with large capital. Positioning data is one example of that shift, and how it is measured is covered in this explainer on retail sentiment in forex.
Despite positive opinions, there is also no shortage of criticism and negative judgments: the "harsh" tones of those who see Forex as a place to speculate or, even, as a space where concluded financial transactions are not very transparent.
In fact, it is not difficult to come across unregulated Forex Brokers that cause serious damage to investors, and it is not too difficult to come across individuals who promise easy earnings.
It is good advice to always be wary of these Brokers and to rely only on those regulated and authorized to operate on the EU market. With the authorization, Consob gives a Broker the possibility to operate with investors in Italian territory, under its supervision.
In fact, Consob is competent "to supervise only compliance with the rules of conduct by the branch in carrying out the activity toward Italian clients", as established in the latest report published on 31 March 2017.
