Foreign Exchange as opposed to other markets

The Foreign Exchange market (Forex) is the largest financial market in the world. Its volume far exceeds that of any other market, and its inherent global reach is limitless. The market that trades over 1.5 trillion dollars daily is free from manipulation of any kind due to its vast size and purely democratic form. The Foreign Exchange market operates as a basic supply and demand model for the world’s major currencies, and even government cannot control the direction of the market. Many analysts regard the Forex market as the most efficient market in the world. The market has no central, physical location such as a pit exchange (i.e. NYSE, CBOT). Rather, the market exists as an electronically linked network of exclusive market participants.

Often, Foreign Exchange is misconstrued for trading currencies through the commodities futures exchanges. However, there are distinct differences and advantages when trading currencies in the cash or “spot” market. First of all, the commodities market trades contracts rather than straight cash, therefore restricting the quantities to specific increments with preset time periods and expiration dates. When you trade in the Interbank market (true Foreign Exchange), you are free from quantity and time restrictions, and have a greater breadth of currencies to choose from in trading. Whereas the futures market trades only the world’s largest currencies, excluding profit potential from smaller currency fluctuations (otherwise known as exotic currencies), the Interbank market can trade virtually any currency. This also provides the opportunity to place crosses, trading any one nation’s currency against any other nation’s currency, as opposed to the futures market where almost all currency contracts trade against the U.S. Dollar only. With respect to fills and market liquidity, the Foreign Exchange market is superior to all other markets. When trading in the Interbank market, all transactions execute instantly since trading occurs on an electronic exchange. By contrast, when placing an order for a futures contract, your order most likely passes through a broker, an order desk, a trading floor, a runner, and finally a pit for bidding. In this way, bad fills are not unusual. Rest assured that this scenario is non-existent in the Foreign Exchange market. Another advantage of prime importance is the degree of liquidity the market offers. Interbank traders are at a huge advantage given the 24-hour market in which they trade. Strategists can capture fast breaking and overnight markets and do not have to race orders to beat a closing bell. Trading in the Foreign Exchange market is an extremely efficient means of hedging against adverse price fluctuations of mutual funds as well as stocks in your portfolio. Remember, any funds invested offshore, including companies’ funds of whose stock you may hold are vulnerable to currency rate changes. However, changes in exchange rates between currencies provide opportunity for profit in the Interbank market, whereas instability of a stock is detrimental to that stockholder’s portfolio. The Foreign Exchange market, unlike stocks, does not rely on projected earnings and growth potential of a nation or its currency (as stock prices do a company). Rather, Forex strategists seek to profit from exchange rate changes, transforming instability into an exciting, lucrative investment opportunity.