What is Forex?

Many years ago I remember how there were lots of exchange currency shops in the streets.

Once I told my father about why he did not buy dollars.

Without knowing I had already converted myself in an evil speculator.

These kinds of shops are less numerous today, especially in Europe, after the adaptation of the common currency.

For many it meant the end of a business.

However, that kind of shops is still quite popular nowadays in some destinations in the World, like London or New York with tourists from all around the World.

When you are a child you do not notice the big difference between the “ask” and “bid” prices of those shops.

In some cases the spread is 5, 10 or even more percent.

Evidently those who make money with those transactions are the businesses.

Forget about making money there.

Other alternative to make money are the banks but they are not much better.

Some years later there are new ways to transfer money in different currencies, like transferwise.

Also we have the Forex world market.

According to some sources there are more than 5 quadrillions traded today every day which compared to the 22 billion that the NYSE move seem a lot.

After all it is 100 times bigger.

Forex market

However, we should not go very fast because there are some issues.

It is possible that Forex moves that money daily but the problem is that many of those transactions are between companies and governments.

You, as an individual trader, cannot participate in those transactions.

The market in which you can trade is not that big after all, in most cases as big as the broker’s book allows.

This is why we should not listen too much to those who say that the Forex market is the biggest in the World.

No.

If we are going to trade Forex is because we know what the market is like and because we want not because we think it is the biggest market in the World.

Because it is not centralized the purchases that Caterpillar does in Argentina are of no interest to us, nor can we participate in them.

When we trade in a broker we are not going to be able to trade trillions in the depth of market book.

At most if you have a big portfolio you will be able to trade in the prime brokers accounts with access to more liquidity but it would be a very rare case, not the typical individual trader.

Therefore, the Forex market is simply that: the daily exchange between all the different currencies in the World, which take place to allow subsequent transactions in goods or services.

This is quite different to the stock and futures markets in which we are trading the real thing in a centralized market.

The Forex market is useful for those international traders who want to buy American stocks, for example. First they need to buy dollars. In this sense, Forex is an indirect market so to speak.

Being an indirect market the prices we will encounter in the Forex brokers are those that they set up considering what they are told by their counterparts the banks. As I have explained before many so-called ECN brokers are nothing else than offering prices from other market makers.

However, despite this I do not mean it is a market we should avoid.

In fact, there are good conditions to trade such market with many of its brokers.

What is difficult is to be able to dominate all the trading techniques needed to win in the long-run.

The fact is that the Forex market is quite complicated, after all.

Regards and good trading.

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