Online Forex Currency Exchange Trading FAQs

What Is Foreign Exchange?

The Foreign Exchange trading market, also referred to as the "Forex" market, is the largest financial market in the world, with a daily average turnover of approximately US$1.3 trillion. Forex is the simultaneous buying of one currency and selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example EURO/USD or USD/CHF.

Who Are The Participants In The FX Market?

The Forex market is called an 'Interbank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.

What Is Margin?

Margin is required collateral for taking a forex trading position. It allows traders to take on leveraged positions with a fraction of the equity necessary to fund the trade. In the forex market leverage ranges from 1% to 2%, giving investors the high leverage needed to trade actively whereas equity market only provides leverage of 50% (double the buying power).

What Are Commissions And Fees charged By MoneyForex?

Unlike many other forex brokers, MoneyForex does not charge any commission in executing a forex trading order. We are a market maker and our major revenue is generated from the spread from currency traded; usually 3 to 5 pips. There is a small cost of holding positions overnight.

What Does It Mean Have A 'Long' Or 'Short' Position?

A long position is one in which a forex trader buys a currency at one price and aims to sell it later at a higher price; the investor is benefiting from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate; the investor is benefiting from a declining market. The risk of having either long or short position will be the same.

How Do I Manage Risk?

The most common risk management tools in forex online trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received. A stop loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against an investor's position. The liquidity of the Forex market ensures that limit order and stop loss orders can be easily executed.

Loonie Slips Versus Dollar, Choppy Versus Euro

Thursday, April 26, 2007 3:47:51 PM - The loonie was mixed against its two major counterparts on Thursday in New York. The Canadian dollar slipped in trading with the dollar and saw choppy movement against the euro. The day's action came as the Bank of Canada released a monetary policy report saying 2007 growth will be the slowest in four years. On Wednesday, the BoC left rates unchanged.

The Canadian dollar slipped in trading with the greenback on Thursday. The move came a day after the currency hit its highest level against the dollar since September 2006. Thursday's action caused loonie to slip throughout the morning and touch a daily low of 1.1222 around 10:30 am Eastern Time. The Canadian dollar moved off that level as the day progressed, however, and by 3:30 pm Eastern Time, it traded at 1.1208 against the buck.

The loonie saw choppy trading versus the euro in New York on Thursday. The Canadian dollar touched a daily high of 1.5196 at 6 am Eastern Time, and a daily low of 1.5264 around 10:40 am Eastern Time. The pair remained range bound entering the afternoon, and by 3:30 pm Eastern Time, the loonie traded at 1.5245 against the euro.

Correction: Pound Down Versus Dollar And Euro; Slightly Up Against Yen

hursday, April 26, 2007 4:15:53 PM - The British pound was generally weaker against the other majors on Thursday morning in New York. The sterling saw a five-week low against the euro and a nine-day low against the dollar. The pound gained slightly on the yen. UK house price inflation nearly doubled in the month of April, a survey indicated Thursday, cementing expectations of a Bank of England interest rate hike in May.

The pound dropped to a nine-day low against the dollar during Thursday trading in New York. In the early morning, the sterling fell away from a weekly high against the dollar, which hovered above a 26-year high seen last week. The sterling began to trend down at around 3 a.m. ET and reached as high as 1.9922 at 10 a.m. ET. Trading was flat in the afternoon and the pair was at 1.9910 at 3:45 p.m. ET.

The sterling fell to a five-week low against the euro on Thursday. The British currency began to slip at around 3 a.m. and reached as low as 0.6834 at around 10:45 a.m. Before the rally, the pair had been range bound for about a day and a half.

The pound was up slightly with the yen during choppy trading within a week-long trading range. The sterling climbed to the top of the range early in the morning before falling back towards the bottom shortly after. The sterling climbed to as high as 238.49 at 5:30 a.m. ET before falling off. The pair was at 238.14 at 4 p.m.

Data to Drive FX by Korman Tam

At 4:00 AM Germany April IFO Index (exp 108.0, prev 107.7)
Germany April IFO Current Conditions (exp 112.6, prev 112.4)
At 4:30 AM UK Q1 GDP q/q (exp 0.6%, prev 0.7%)
UK Q1 GDP y/y (exp 2.8%, prev 3.0%)
At 8:30 AM US March Durable Goods Orders (exp 2.5%, prev 1.7%)
At 10:00 AM US March New Home Sales (exp 888k units, prev 848k units)

The dollar remains under pressure against the major currencies amid renewed concerns of further deterioration in US economic fundamentals. Yesterday’s dismal existing home sales, which posted its steepest decline since 1989, pushed the greenback to fresh 2-year lows versus the euro and just shy of its all-time low against the single currency.

Economic data will remain the primary focus among fx traders for the coming session, with durable goods and new home sales slated for release. The key concern among markets is the direction and timing of any FOMC policy moves in the coming months. Given the lingering weakness in the housing market and gradual decline in overall economic activity, we feel the next rate move will be a shift to an easing stance. However, the timing will hinge on the pace of deterioration in economic fundamentals. The March durable goods report, which is a typically volatile reading, is expected to improve to 2.5% versus 1.7% in February. Meanwhile, the new home sales are forecasted to improve 888k units, up from 848k units a month earlier.

Dollar Extended Loss after New Home Sales by Yan Xu

The dollar extended its loss against the euro and sterling after lower-than-expected US new home sales reinforced expectations for a Fed rate cut as early as October. The euro rose to 1.3665, close to the record peak at 1.3670. The sterling climbed back to above the 2 handle versus the dollar.

US new home sales rose 2.6% to an annual rate of 858k units in March, but below the consensus of 888k. Recall that the sharp decline in March existing home sales induced a dollar sell-off yesterday. The lackluster data today put the slowing housing sector in the spot light again.

Earlier, the dollar edged up slightly after durable goods orders rose 3.4% in March, beating the estimate of 2.5%. However, a single upside surprise in such a volatile indicator is not sufficient to challenge the expectations of the economy and the Fed rate outlook.

CFTC warnings

The CFTC lists 9 warning signs for foreign exchange trading fraud:

1. Stay away from opportunities that seem too good to be true

Always remember that there is no such thing as a "free lunch." Be especially cautious if you have acquired a large sum of cash recently and are looking for a safe investment vehicle. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. Getting your money back once it is gone can be difficult or impossible.

2. Avoid any company that predicts or guarantees large profits

Be extremely wary of companies that guarantee profits, or that tout extremely high performance. In many cases, those claims are false.

The following are examples of statements that either are or most likely are fraudulent:

"Whether the market moves up or down, in the currency market you will make a profit."

"Make $1000 per week, every week"

"We are out-performing 90% of domestic investments."

"The main advantage of the forex markets is that there is no bear market."

"We guarantee you will make at least a 30-40% rate of return within two months."

3. Stay Away From Companies That Promise Little or No Financial Risk

Be suspicious of companies that downplay risks or state that written risk disclosure statements are routine formalities imposed by the government.

The currency futures and options markets are volatile and contain substantial risks for unsophisticated customers. The currency futures and options markets are not the place to put any funds that you cannot afford to lose. For example, retirement funds should not be used for currency trading. You can lose most or all of those funds very quickly trading foreign currency futures or options contracts. Therefore, beware of companies that make the following types of statements:

"With a $10,000 deposit, the maximum you can lose is $200 to $250 per day."

"We promise to recover any losses you have."

"Your investment is secure."

4. Don't Trade on Margin Unless You Understand What It Means

Margin trading can make you responsible for losses that greatly exceed the dollar amount you deposited.

Many currency traders ask customers to give them money, which they sometimes refer to as "margin," often sums in the range of $1,000 to $5,000. However, those amounts, which are relatively small in the currency markets, actually control far larger dollar amounts of trading, a fact that often is poorly explained to customers.

Don't trade on margin unless you fully understand what you are doing and are prepared to accept losses that exceed the margin amounts you paid.

5. Question Firms That Claim To Trade in the "Interbank Market"

Be wary of firms that claim that you can or should trade in the "interbank market," or that they will do so on your behalf.

Unregulated, fraudulent currency trading firms often tell retail customers that their funds are traded in the "interbank market," where good prices can be obtained. Firms that trade currencies in the interbank market, however, are most likely to be banks, investment banks and large corporations, since the term "interbank market" refers simply to a loose network of currency transactions negotiated between financial institutions and other large companies.

6. Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise

Be especially alert to the dangers of trading on-line; it is very easy to transfer funds on-line, but often can be impossible to get a refund.

It costs an Internet advertiser just pennies per day to reach a potential audience of millions of persons, and phony currency trading firms have seized upon the Internet as an inexpensive and effective way of reaching a large pool of potential customers.

Many companies offering currency trading on-line are not located within the United States and may not display an address or any other information identifying their nationality on their Web site. Be aware that if you transfer funds to those foreign firms, it may be very difficult or impossible to recover your funds.

7. Currency Scams Often Target Members of Ethnic Minorities

Some currency trading scams target potential customers in ethnic communities, particularly persons in the Russian, Chinese and Indian immigrant communities, through advertisements in ethnic newspapers and television "infomercials."

Sometimes those advertisements offer so-called "job opportunities" for "account executives" to trade foreign currencies. Be aware that "account executives" that are hired might be expected to use their own money for currency trading, as well as to recruit their family and friends to do likewise. What appears to be a promising job opportunity often is another way many of these companies lure customers into parting with their cash.

8. Be Sure You Get the Company's Performance Track Record

Get as much information as possible about the firm's or individual's performance record on behalf of other clients. You should be aware, however, that It may be difficult or impossible to do so, or to verify the information you receive. While firms and individuals are not required to provide this information, you should be wary of any person who is not willing to do so or who provides you with incomplete information. However, keep in mind, even if you do receive a glossy brochure or sophisticated-looking charts, that the information they contain might be false.

9. Don't Deal With Anyone Who Won't Give You Their Background

Plan to do a lot of checking of any information you receive to be sure that the company is and does exactly what it says.

Get the background of the persons running or promoting the company, if possible. Do not rely solely on oral statements or promises from the firm's employees. Ask for all information in written form.

If you cannot satisfy yourself that the persons with whom you are dealing are completely legitimate and above-board, the wisest course of action is to avoid trading foreign currencies through those companies.

Forex scam

A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to unreasonably profit by trading in the foreign exchange market, which would be a zero-sum game were it not for the fact that there are brokerage commissions, which technically make forex a "negative-sum" game. These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, improperly managed "managed accounts", false advertising, Ponzi schemes and outright fraud. It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment. The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry. An official of the National Futures Association was quotedas saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million, mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?" The highly technical nature of retail forex industry, the OTC nature of the market, and the loose regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory authorities, can find it very difficult to prove that market manipulation has occurred since there is no central currency market, but rather a number of more or less interconnected marketplaces provided by interbank market makers.

Speculation

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) have argued that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional speculators. Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view; it is simply gambling, that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.

The difference between spot and futures in forex

Before a description of retail trading, it is important to understand the difference between the spot and futures markets. Futures are generally based on contracts, with typical durations of 3 months. Spot, on the other hand, is a two-day cash delivery. While the futures markets were created to hedge out risks and speculate on future market conditions, spot was created to allow actual cash deliveries. Spot developed a two-day delivery date to give those transporting the actual cash a window of time to receive it. While in theory there still is a two-day delivery date imposed after a forex transaction, this is effectively no longer used. Every day, at 5 pm EST (the predetermined end of the trading day) spot positions are closed and then reopened. This is done to guarantee an unlimited timeline for delivery. For example, if a spot transaction occurs on a Monday, the delivery date is Wednesday. At 5 pm on Monday, the position is closed and then immediately re-opened; now this is a new position with the close date of Thursday. This daily process allows an investor to hold open a position indefinitely.

Another important difference between futures and spot is how interest is credited. Each currency in a forex transaction has an inherent interest rate attached to it. In the case of the US dollar, this is the Federal Funds Rate. This interest is added every day whether the market is trading or not. Interest cannot take a vacation; money and its loaning value are still important even if the financial world has stopped dealing. In futures, the interest is built into the price of the contract. In spot, however, interest is not taken into account in the offering price because the spot market is a cash market, not a contract market. There must be some mechanism for crediting interest, and various institutions have developed ways to do it. The most common method is to credit that day’s worth of interest at the same time they “flip” the position, or carry it over to the next day. This is important for later discussions and analysis because the transactions examined in this study had interest credited at the end of the business day at exactly 5 pm EST. If a position was held from 5:01 pm on Tuesday and closed at 4:59 pm on Wednesday, no interest would be credited for that day. If, on the other hand, a position was opened Tuesday at 4:59 pm and closed Tuesday 5:01 pm, a full day’s interest would be credited. This has interesting ramifications; traders who work intra-day, or “day traders,” often do not use interest for either gain or loss.

Financial instruments

There are several types of financial instruments commonly used.

Spot: Aspot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments.

Forward transaction: One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.

Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Swap: The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not contracts and are not traded through an exchange.

Options: A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

Algorithmic trading in forex

With steady growth of the FX markets and the increasing adoption of E-FX among the market participants, algorithmic trading is emerging as the next level of trading technology for market participants to contend with. Although there is much confusion about the technique, most market participants seem to agree that it will be used increasingly frequently. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Economic factors

These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates). Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets. For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market psychology

Perhaps the most difficult to define (there are no balance sheets or income statements), market psychology influences the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality" -with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.

Long-term trends: Very often, currency markets move in long, pronounced trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect - the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Trading characteristics

There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.

Top 6 Most Traded Currencies

Rank	Currency	ISO 4217 Code	Symbol
1	United States dollar	USD	$
2	Eurozone euro	EUR	€
3	Japanese yen	JPY	¥
4	British pound sterling	GBP	£
5-6	Swiss franc	CHF	-
5-6	Australian dollar	AUD	$

The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.

The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily traded products were:

• EUR/USD - 28 %
• USD/JPY - 18 %
• GBP/USD (also called sterling or cable) - 14 %

and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100% for all the sellers, and 100% for all the buyers).

Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus far still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.

Market participants

Top 10 Currency Traders

% of overall volume, May 2006

Source: Euromoney FX survey^[1]

Rank	Name	% of volume
1	Deutsche Bank	19.26
2	UBS	11.86
3	Citigroup	10.39
4	Barclays Capital	6.61
5	Royal Bank of Scotland	6.43
6	Goldman Sachs	5.25
7	HSBC	5.04
8	Bank of America	3.97
9	JPMorgan Chase	3.89
10	Merrill Lynch	3.68

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia. Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization. Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.

Hedge funds

Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Retail forex brokers

Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market.

Market size and liquidity

The foreign exchange market is unique because of: its trading volume,the extreme liquidity of the market,the large number of, and variety of, traders in the market,its geographical dispersion,its long trading hours - 24 hours a day (except on weekends).the variety of factors that affect exchange rates,

According to the BIS study Triennial Central Bank Survey 2004, average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below: Global foreign exchange market turnover: $621 billion spot$1.26 trillion in derivatives, ie$208 billion in outright forwards$944 billion in forex swaps$107 billion in FX options. Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20). Average daily global turnover in traditional foreign exchange market transactions totalled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market.[1] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006. Other large centres include the US (with a 18.2% global share), Japan (7.6%) and Singapore (5.7%) (Chart 2). Most of the remainder was accounted for by trading in Germany, Switzerland, Australia, Canada, France and Hong Kong. The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000. These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 5 pips wide (i.e. 0.0005). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 1.5 pips.

Foreign exchange market

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The trade happening in the forex markets across the globe currently exceeds US$1.9 trillion/day (on average). Retail traders (individuals) are currently a very small part of this market and may only participate indirectly through brokers or banks and may be targets of forex scams.