The world of Forex investment is a complex one that is made up of many different elements. If you want to understand its systems and processes, first you have to study the basic terms involved. It takes more than just a few days to comprehend most financial investments—you have to continuously study them as the investment arena changes daily. Understanding theory is good, but learning to apply financial market concepts is more important.
Basic Terminologies
The most essential and significant term to understand is, of course, “Forex.” It literally means foreign exchange market. It is also called FX and currency market. So what is Forex exactly? The foreign exchange market is a global “decentralized” financial market where currencies are purchased and sold.
Trading Systems
The world’s biggest centers of finance each have their own Forex trading systems, which serve to allow buying and selling of the different types of stocks and currencies. Forex day trading happens every single day of the week, except during the weekends. From the traders side, there are many types of Forex trading systems for day trading. There are also Forex systems for swing and position trading. Swing traders usually hold their trades a few days, while position traders may hold their trades for weeks and even months. One type of day trader focuses on very short-term trades lasting only seconds or a few minutes. These traders are called “scalpers,” and some brokers do not allow this type of trading. There are both manual and automatic Forex trading systems (free and for sale) for all of these different types of trading strategies.
Monitoring the Market
What does a Forex dealing desk broker do on a daily basis? Well, the Forex brokers basically are conduits that allow speculators and institutional investors the ability to trade international currencies both to provide a means of exchanging good and items in international commerce, as a hedge mechanism to offset possible future price changes and also as a speculative mechanism to allow traders the ability to make money off currency fluctuations.
Here is a more concrete example to help you visualize that definition: with the help of international currency exchanges, a company, corporation, or establishment in Japan imports goods, products, and items from any country in Europe. When they conduct agreements and payments, they can do so by exchanging the Japanese Yen into the Euro currency (Euro Dollar). This way, there is no requirement to first determine what a Euro would cost in Japan or what a Yen would cost in Spain. The foreign currency and exchange market takes care of defining the exchange rates so global commerce can take place without currency exchange rates being an obstacle.
Other Characteristics
If you want to pursue Forex trading, you must study and comprehend how financial markets work. Here ere are the other characteristics of the foreign exchange market: it is wide in reach in terms of geographical dispersion; its trading hours never end during weekdays as it runs for 24 hours during the entire day; and its exchange rates for each currency are affected by various factors.
No Market Regulation
It also important to take note that when it comes to the foreign exchange market dealings, there is seldom any regulation on border to border negotiations, agreements, and dealings. Also, there is not one currency rate that banks, corporations, and establishments follow—usually, they acquire and create their own rates and prices. Of course, this does not mean that their rates are so much different from each other—it just so happens that there is very little differences between their pricing methods.
Forex Dealing Room – What “Market Maker” Brokers Do
When referring to Forex brokers, there are brokers that have a Forex dealing desk and those that do not. Brokers with a dealing desk, often called “market makers,” take the opposite side of all orders placed by their account holders to add liquidity to the execution of orders or they may offsetting the order with other market participants. They effectively trade against their account holders, which can be a conflict of interest. Because of this, many traders believe that the brokers will purposefully exaggerate the prices that they feed to their traders and even occasionally greatly exaggerate a currency price to trip all the stoploss orders to the advantage of the broker.
The Forex dealing platform most often used with market makers is MetaTrader. In fact, this was the reason the platform was developed, although there are other Forex dealing system platforms besides MetaTrader. The MetaTrader platform in the last few years has been adapted to be used by ECN and other non-dealing desk brokers. Because of these fears, and the highly unregulated nature of the Forex spot market, wise traders will opt to have accounts with brokers that have been established several years, have some regulatory agencies reviewing their operations (such as the National Futures Association), and do not have a Forex dealing desk. ECN brokers, for example, such as MB Trading and ACM Forex, do not have dealing desks.
ECN is an acronym for Electronic Communications Networks, and companies that utilize this method of order execution are referred to as Forex no dealing desk brokers. There are also Forex no dealing desk brokers that do not use ECN execution. Orders are executed by competing bids from traders (individuals, corporations and large financial institutions). MB Trading is one ECN broker that I have used, and I’ve been impressed with their services.