Technology has changed the world we live in. Every industry in the business world has been revolutionized by the advance of the internet over the last 15 years, but one could argue that the forex industry is at the top of that list (of changed markets).
Forex is an abbreviated form of “foreign exchange.” The Foreign Exchange Market is where traders trade money. In the stock market, traders trade stock. But in the forex market they trade currency. To understand it in real terms, let’s break down a real-life example.
If you travel to Paris for vacation (for those of you who are travel inclined, check it out! 36 hours in Paris!), for example, you will most likely need to convert your U.S. Dollars into Euros. When you approach the currency exchange counter to trade US Dollars for Euros, you are trading in the forex market! Let’s assume that you want to exchange $100 for Euros. At the current exchange rate, you would receive about 70 Euros. Essentially, you just sold $100 and you bought 70 Euros.
How Much Is Traded In Forex?
Now, this happens on a millisecond basis in the forex market to the tune of about $4 trillion a day. That is how much the Bank of International Settlements estimates is turned over each day in the foreign exchange market. The New York Stock Exchange experiences about $75 billion a day in turnover. Thus, the FX Market is roughly 40 times larger than the NYSE!
Who Trades Forex?
The main players in the forex market, however, are not people exchanging money when they are on vacation. In fact, that is a very small percent of the average daily turnover. The main players in the forex market each day are central banks and governments, hedge funds, large banking institutions, and very wealthy, sophisticated investors.
Until the late 1990’s, in fact, the only players allowed in the forex market were banks, hedge funds, and very wealthy people. The reason is rather simple. The minimum contract size during those days was generally $1,000,000, which meant that a market participant needed at least that amount just to hold 1 contract. This minimum contract size made it essentially impossible for most people to trade in the FX Market. Today, however, the advance of the internet and technology has opened the door for small, retail online brokerages to open up shop.
Advantages of the FX Market
The FX Market operates on a 24 hour basis. Liquidity and market action simply flow from one time zone to the next as Central Banks and large financial institutions open and close shop each day. This schedule makes it much easier for U.S. businesspeople to trade the FX Market because they are able to trade before and after normal working hours.
The FX Market is not only the largest financial marketplace in the world, but it is also the fastest growing. The Bank of International Settlements estimates that average daily turnover in the FX Market will reach $8 trillion by 2020, which means the Forex Market is a growth industry, set to expand in the coming decade.
Disdvantages of the FX Market
These advantages aside, there is also a high risk trading the forex market. As with any investment or trading, the risk of loss is substantial and forex trading is not suited for everyone.
Learn as much as you can about the dynamics, factors and risks before considering trading. There are also many professionals out there, as well as great courses and training material, that you should consult prior to making your decision.
To Forex, or Not to Forex?
Should you invest in Forex? That entirely depends on a few things… 1) Your comfort level, 2) Your current financial situation, and 3) Your willingness to learn about financial markets and stay abreast of the current markets.
MLR’s Note: I don’t think this is as simple as putting your money in a Target Retirement Fund and forgetting about it, so make sure you educate yourself before making any risks!