Forex Market: Overview


Welcome to Global Foreign Exchange Market (FX or Forex or Foreign Currency)!!!

The largest financial Market in the world as measured by daily transactions' turnover with more than US $5 trillion a day, which is even greater than world’s whole stock and bond markets. It is a decentralized market, where world’s currencies trade between two or more than two parties.

The market has high liquidity due to a large number of traders (buyers and sellers) all over the world, it has also less difference between BID and ASK price. Unlike other markets, growth of forex trading, investing and management activities are increasing, day by day.

Market Structure

There are two types of market on the basis of transaction mechanisms

1. OTC (Over the Counter) – The market where transactions take place between two parties directly or without any broker or any other third party, known as Over the Counter or OTC market. These types of markets are also known as decentralized markets, because there are no central authority on which people are trusting.

2. Exchange Market – The market where transactions take place between two or more parties indirectly or broker or any third party, known as exchange market. It is also known as centralized market. For example: Stock Markets and Bond Markets

In case of forex market, most of the transactions takes place directly in OTC (Over the Counter) market, which is an independent market unlike exchange or centralized markets. Due to high-liquidity and more accessibility, the market has lot of transactions and traders.

Market Participants

In forex market, there are various participants such as Central Banks, commercial banks or investments banks, hedge funds, retails investors, financial brokers and mutual funds etc.

These participants have their several aims to trade, some of them do transactions to sustain their economy, some of them try to sustain their private entity's reserves, rest of them are intermediaries or brokers, who are helping other participants within their trades.

Let's look at each of them and try to know about their objectives, volume of transactions.

Participants in FOREX MARKET

Commercial Banks

The major participant in Forex Markets, it can be said that Central Banks are the core of the Foreign Exchange Market. Globally, there are 100-200 central banks are involved. There are mainly three objectives:

  • serving retail customers
  • banks Customers
  • making international investment within financial assets which are required in foreign exchange

For Commercial Banks, there are two ways to operate within Forex Market:

  1. Retail Level: At retail level, the deals go on with exporters, customers-corporations.
  2. Wholesale level: At wholesale level, these banks maintain an inert bank market within FX (Foreign Exchange) either directly, or via specialized foreign exchange brokers.

Small banks and Investors

These banks and investors are also included within foreign exchange markets, the needs of these banks and investors are small with compare to other participants except retailers. But they are also in important participant of forex because they use to hedge within the market.

Central Banks

Central Banks participate within foreign exchange markets, central banks are the central monetary authorities of various countries.

Central banks intervene within forex marker to maintain their currency rates within some desirables ranges and to smooth fluctuation within the chosen range.

Forex Brokers

Foreign exchange brokers are the intermediaries, or agents who facilitates trading between the dealers. Unlike other participants, Forex Brokers do not keep their money within the currency market. Instead, they serve other participants by matchmaking their needs.


MNCs uses derivatives or forwards (more specific), because they exchange cash-flows with other multinational branches, or international entities. Usually, MNCs do trade (either send or receive) using forward contracts, because currencies use to fluctuate within each second. So, that is why MNCs often hedge these future cash flows through the inter-bank forward exchange market.

And there is no doubt that MNCs are the major non-bank participant within foreign exchange market.

Major Currencies and Trade System

In forex market, we have lot of currencies and currency pairs but there are a few currencies which have their unique features and also consist most of the transactions within world.

Here, six major currencies are given –

  1. The US Dollar (USD)
  2. The EURO (EUR)
  3. The Japanese Yan (JPY)
  4. The British Pound (GBP)
  5. The Swiss Franc (CHF)
  6. The Canadian Dollar (CAD)

There are various types of trade system through traders do transactions in forex market but commonly, there are three types of TRADE SYSTEM-

  1. Trade with brokers
  2. Direct Dealing
  3. Matching System

Market Analysis

There are various types of analysis of market participants with respect to their needs, time-interval and intentions, but mostly they focus on three types of market analysis-

  1. Fundamental Analysis
  2. Technical Analysis
  3. Sentiment Analysis

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