What is the foreign exchange market - functions and participants of the global foreign exchange market

What is the international foreign exchange market and what functions does it perform? Who are the participants in the global foreign exchange market? What risky situations arise when trading on the Forex market?

Hello, dear readers! Alexey Morozov, expert and author of articles, is in touch.

Today we will continue the topic of making money on the Forex currency market. In this article I will talk about the key features of the foreign exchange market, its advantages and disadvantages, as well as the secrets of successful trading.

So, full speed ahead!

The foreign exchange market is

The investment market consists of a large number of parts, one of which is the foreign exchange market. In order for a trader or investor to achieve excellent results when trading and handling financial instruments, it is important to have an understanding of the most important components of the global investment market.

The history of the emergence of foreign exchange markets began to emerge during the existence of Ancient Rome. Even in those distant times, there were currency exchange relations between different countries of the world. During the existence of Rus' there were even such people who were also called “money changers”. For them, currency was a means of earning money. These people provided money exchange services. At the same time, they received payment for them.

However, the first currency markets in the usual sense began to emerge in the 19th century. First, national currency markets began to emerge. It was thanks to them that anyone could purchase the currency of any country in the world. At the same time, the stock exchange also developed.

The modern foreign exchange market is almost limitless. Forex brokers and many other participants have the opportunity to buy the currency of any country in the world without leaving home. The main thing is only to have access to the Internet and make transactions for the purchase and sale of currency.

The foreign exchange market is the most important part of the world economy, which is very sensitive to political and economic events in any country.

Bibliography

[CME19] CME Group. EBS Market Participant Eligibility Criteria
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2022. [DGP15] Dietrich Domanski, Leonardo Gambacorta, and Cristina Picillo. “Central clearing: trends and current issues.” In: BIS Quarterly Review December
(2015), pp.
59–76. [Eur19] Euromoney. Euromoney FX Survey 2022 results released
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Press release. 2022. [Gol19] Victor Golovtchenko. FXSpotStream, CBOE and LMAX Exchange Gain eFX Market Share
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2022. [Hul15] John C Hull. Options, Futures, and Other Derivatives
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9th ed. Pearson, 2015. ISBN: 9780133456318. [Rod16] Kevin Rodgers. Why Aren't They Shouting?: A Banker's Tale of Change, Computers and Perpetual Crisis
. Random House, 2016. ISBN: 9781473535633.

Currency markets of the world

The modern world economy will practically not be able to operate at the proper level if there is no developed financial market. One of its main components is the foreign exchange market, represented by numerous types. It is also called the insurance market because it provides insurance against currency risks.

Today there is a formed currency system, which is based on constantly changing exchange rates and the development of telecommunications technologies. Foreign exchange markets, whatever their types, have all the parts that make up a regular market:

objects and subjects
supply and demand
structure
communications
commodity prices
investments
speculators

There are a large number of financial centers in the world, where the largest foreign exchange markets are located. They are located in cities such as:

Paris
London
Tokyo
Hong Kong
Zurich

They are also available in other cities around the world. The funds that enter the circulation are sent to banking institutions. One of the largest in terms of money turnover is the London foreign exchange market. It handles approximately $500 billion worth of transactions. If we talk not only about the capital of Great Britain, but also about the entire state as a whole, it can be noted that its stock market is considered one of the most developed in the world.

Trade balance

One of the main factors is the trade balance. It is the difference that exists between the total exports and imports of a particular country. If the structure of its foreign trade is dominated by exports, this means that foreign currency is supplied in excess to the state, therefore, there is an increase in demand for the corresponding national currency, as well as an increase in its exchange rate. On the contrary, in a situation of trade deficit (that is, when the volume of exports is less than the volume of imports), the national currency should weaken. In reality, the mutual influence of interest rates, inflation, exchange rates and trade mixes all these factors so much that the connection between them becomes completely unobvious.

Types of foreign exchange markets

The foreign exchange market has a complex structure that simply needs to be understood in order to make profitable foreign exchange transactions and make the right decisions on certain transactions.

The foreign exchange market is divided into several types according to the following criteria:

According to the degree of distribution of foreign exchange transactions: world foreign exchange market, national foreign exchange market.
By degree of organization: exchange foreign exchange market, over-the-counter foreign exchange market.
In relation to currency restrictions: free, not free.
By mode: single mode, double mode.
By composition of participants: direct foreign exchange market, brokerage foreign exchange market.
By time of transactions: urgent, cash.
By contracts: currency futures market, currency options market.

World market

The world market is a union of markets in different countries of the world, connected by satellite and cable communications. They are attractive to such participants in the modern market as investment companies. The global foreign exchange market has one important task, which is to service the cash flows arising from international financial transactions. The object of purchase and sale can be any financial instrument denominated in currency.

Among the most popular trade items are:

currency deposit on demand
bill of exchange (draft)
letter of credit
check

Exchange market

The foreign exchange market today is distinguished by its excellent organization. One of its most important representatives is the currency exchange, of which the securities market is a direct part. It has a whole set of rules that allow you to make transactions with stocks, bonds, futures and currencies.

The main task of such an exchange is to mobilize available financial resources through trading in securities. It is thanks to the currency exchange that it is possible to establish the market value of a particular currency.

In general, an exchange market is defined as a market for a wide variety of financial instruments, which has a certain set of rules governing how each transaction should be carried out. He almost always offers to buy or sell securities, currencies and other instruments, making transactions with a high level of risk, but at the same time with high profitability. To minimize risks there is a hedge fund. He always acts in the interests of the investor.

Regime

The regime foreign exchange market is divided into two categories:

single mode foreign exchange market

A feature of this type of foreign exchange market is the subtlety in determining the exchange rate. The fixing method is used. A floating rate is also determined, which largely depends on supply and demand.

single mode foreign exchange market

It can use both fixed and floating exchange rates equally.

Temporary (for transactions)

The temporary foreign exchange market is divided into the following categories:

Cash foreign exchange market, which is characterized by the fact that conversion transactions are carried out on it. They were called spots. Foreign currency delivery is carried out in the shortest possible time, which may not exceed two days.
The forward foreign exchange market is distinguished by the fact that all transactions on it are carried out almost instantly. Currency exchange is possible immediately.

The derivatives foreign exchange market is characterized by the fact that it includes the following types of markets:

Currency futures. Such transactions differ in that the purchase of currency is made at a certain price, which was established at the time of the transaction. However, the operation may be postponed for a predetermined time.
Currency forwards. They are not concluded on a foreign exchange exchange, which distinguishes them from futures. They are in writing and cannot be resold. Such transactions allow the transfer of rights to assets to another owner.

Contract

The contract foreign exchange market is a market in which trading is carried out primarily by contracts. It can be represented by two subspecies at once:

• currency futures market

The object of purchase and sale transactions is a contract. The buyer and seller agree on a time frame within which one can purchase a specific product and the other can sell it at a set price.

• currency options market

In this type of market, a contract also acts as a trading instrument, but thanks to it, the seller and buyer have the opportunity to make a transaction on it at a certain price on a set day.

Currency options and currency futures have distinctive qualities. Transactions on the first are not necessarily concluded on the stock exchange. They may be located in other places. But in order to deal with currency futures, you cannot do without an exchange. In particular, such transactions are not uncommon for the MICEX.

Functions of the foreign exchange market

It is very difficult to imagine the functioning of a modern economy without the foreign exchange market. It is thanks to him that uninterrupted financial cooperation occurs between countries that are economic partners. However, it also has a large number of important functions:

carrying out all financial settlements and fulfilling obligations on time
provides methods of protection against credit and currency risks
currency markets around the world can interact with each other thanks to the global foreign exchange market
helps different countries of the world create the necessary reserves of currency
adjusts the exchange rate using supply and demand
provides assistance so that every state in the world can implement its monetary policy
helps you make money on differences in exchange rates

Interest rates

This is another indicator with which you can track dynamics, characterizing various currency markets. An interest differential is the difference between the interest rates that apply to two specific currencies. This factor is the most important, which directly determines the relative attractiveness of these two currencies, and therefore the possible demand for one or another of them.

Many types of interest rates operate in the money market of each state. This is, for example, the official interest rate - the one at which various banks borrow money from the central bank; interbank borrowing rates at which they borrow money from each other; rates that determine the profitability of government-owned securities, etc. All of them are closely related and are ultimately determined by the official interest rate (it is set by the Central Bank of the corresponding country).

How to trade on the Forex market?

Today there are a large number of people who are attracted by the excellent prospects of trading in the foreign exchange market. This is an opportunity to earn a stable income without spending a lot of effort. The main thing is to figure out how to make money only in the initial stages. After all, for this you need to do a lot of things:

find a good broker with excellent terms of cooperation and a large selection of trading instruments
undergo training
open a trading account
install a trading terminal
decide on a strategy
choose trades and try to make money on them

Choosing a broker

Trading on the foreign exchange market is carried out with the help of brokers. Today there are a considerable number of companies offering reliable leverage and the ability to trade Forex. In order to choose the optimal company for cooperation, you need to familiarize yourself with the terms of service, financial instruments, deposit size, etc. Most often, brokers offer initial training. They provide a large amount of materials for this that you can familiarize yourself with. They will help you become familiar with the principles of making transactions and choose a strategy, which is a set of rules. The trader must follow them even if the transaction initially seems unprofitable.

TOP brokerage companies

Trading in the foreign exchange market may require professional assistance from brokers. Currently, there are a number of reliable brokerage companies, among which are:

Alpari
Forex4you
Instaforex
RoboForex

For traders who are just starting their journey, a Nano cent account is offered. In order to start trading, no more than two dollars will be enough. Those clients who are ready to invest more can use the Standard account. If you don’t want to trade on your own, you can use PAMM accounts and get a stable income.

Tele Trade Group is also a reliable broker. It is licensed by the Central Bank of our country. The company offers the use of training accounts to practice conducting transactions. Forex Club is another very successful broker that offers trading not only currencies, but also other financial instruments. Among them are shares of leading Russian companies.

Opening a trading account

After practicing trading on the stock exchange using a demo account offered by the selected broker, you can proceed to opening a real account, which will help you receive real money as income, not virtual. To open your account you need to make a deposit. Each broker has a minimum amount. Depending on the amounts for which the trader is ready to enter into transactions, he can deposit amounts that are greater or less than the minimum deposit. Experienced traders recommend participating in transactions of at least $250. If the transaction amount on the foreign exchange market is smaller, the level of risks will be high.

Trading terminal

To trade, you need to download and install the trading terminal. It is usually installed directly on the computer. However, today there are an increasing number of companies that conduct online trading. In order to start taking part in transactions, you need to launch the trading terminal and log in. To conduct transactions, it is important to be able to perform technical and fundamental market analysis.

Risks when trading

It doesn’t matter whether it’s the foreign exchange market, the credit market or many of its other varieties, all the same, any financial transactions will be accompanied by great risks. And on the website of any broker that a trader is going to choose or has already chosen, it will be indicated that when making transactions on the foreign exchange market, there is a risk of loss of capital.

This is almost impossible to avoid. Risks of various types will still occur, and the main thing is to be able to cope with them. This is necessary for successful transactions. The peculiarity of the market is that it almost always goes against the trader, which leads to a significant reduction in the balance in his account.

Rate jumps

In order to prevent unnecessary losses of your funds due to changes in the exchange rate, you need to install the “Stop Loss” function. The principle of its operation is that the transaction is closed by the broker even if the trader is not online at the time if the price reaches a certain level. Traders very often have to face financial losses when they are unable to be at the computer during a transaction. “Stop Loss” can be launched even while opening a position. After all, sharp price fluctuations can appear in the market at any time.

“Stop Loss” - translated from English as “stop losses”. This order is placed in order to limit the loss of funds in the event of negative developments (loss limitation).

The emergence of panic

Psychological risks are constant companions of every modern newbie trader. The first feeling of panic appears after he sees a negative balance on the account after paying the fee. At the same time, a person begins to make mistakes under the influence of his emotions. When trading in the foreign exchange market, it is important to understand that it involves a large number of people who influence each other. At the same time, it is important to understand that you should not act as the majority does. To make a profit, it is important to first analyze the situation and then make a decision.

Non-market risk

There are a large number of situations when a trader may face the loss of his funds not because of the market situation. Sometimes a technical glitch occurs after a person has entered into a trade, but he has not yet managed to enable Stop Loss. As a result of a power outage or problems with the Internet, the trader was cut off from the network. As a result, after everything has worked out, he learns from the news that the market has gone against him. It turned out that he lost his deposit. It is precisely such reasons, independent of the market, that are called non-market.

Foreign exchange market participants

Participants in the foreign exchange market can be divided into representatives of the first level and the second. The first level is the category of exchange offices where currency exchange transactions are carried out. This level has virtually no effect on the exchange rates of different countries of the world. Their changes are influenced by the second level or category of market makers.

These participants include:

commercial banks
brokers
financial institutions
multinational companies

To obtain a stable income, trading in the foreign exchange market is the best option for many novice traders. It involves a large number of participants, whose activities affect exchange rates. For successful trading, it is important to know how the market works and what functions it performs. When trading, you should not forget about the risks associated with almost all foreign exchange transactions.

Author Ganesa K.

A professional investor with 5 years of experience working with various financial instruments, runs his own blog and advises investors. Own effective methods and information support for investments.