How Does The Forex Market Work
The Forex market
is considered to be the biggest financial market in the world. It is a huge international exchange where different currencies are traded twenty-four hours a day. This exchange is not governed by the rules of any particular country. The biggest disadvantage of this market is that there are no specific regulations applicable, no clearinghouses to stand as guarantors of trade, and no international panels to settle disputes if any should arise. Thus, a credit agreement is the only binding factor between the seller and buyer.
While this system may seem very imprecise and vague, competition and the requirement for cooperation ensure that Forex traders deal honestly. Thus a trader cannot survive, unless he or she keeps up his/her part of the deal. However, on a national level, most countries have their own associations to look after the rights of the clients by regulating the brokers or Forex traders that belong to that country. They have their own arbitration panel to settle disputes. Hence, in the event of disputes arising, they insist on their members accepting the decision of the panel. These associations are known by different names in different countries, but in the US they are known as the National Futures Association, or the NFA.
Another distinguishing factor of the Forex market is that it does not work on a commission basis, but only on the principal amount. Hence, Forex brokers earn money not by commission but by conducing the trade itself. The brokers earn their share of money on the bid ask spread, i.e. the difference between the buying and selling prices of a currency. Hence, they are not brokers in the conventional sense, but are more like Forex traders themselves.
One of the best aspects of the Forex market is that it is virtually impossible for any investor or financial institution to misuse it. This market is so large, with the daily money flowing through it estimated at trillions of dollars, that no single group of traders, no matter how large, can have the ability to take control of the Forex market in any significant manner. This signifies that apart from the fundamental forces that drive it, it is free of any other influences. Thus, irrespective of influence or size, this market offers each investor equal opportunities, making it fair and free. This feature is particularly attractive for small investors who often suffer the most from stock market scams and fraudulent activities.
While these aspects of the Forex market make it very attractive for investing money in, in reality it is very difficult to make money in this market. In every deal, if a trader is to make a profit, then he/she will have to outdo the bid ask spread price. But that not being the case every time, it makes the opportunities for the arbitrage profit limited. Nevertheless, since there are no extra commissions or charges, the Forex trader can enjoy every bit of the profit he or she can make, once they get past the bid ask spread point.
To sum up, to be successful in the Forex market an investor has to be well trained, vigilant and market savvy.