What is Forex Trading

• What is forex? Quite simply, it’s the global market that allows the exchange of one currency for another.
  If you’ve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.
• The forex market is open 24 hours a day and 5 days a week, only closing down during the weekend. (What a bunch of slackers!)
  So unlike the stock or bond markets, the forex market does NOT close at the end of each business day.
  Instead, trading just shifts to different financial centers around the world.
  The day starts when traders wake up in Sydney then moves to Tokyo, London, Frankfurt and finally, New York, before trading starts all over again in Sydney!
  In the next section, we’ll reveal WHAT exactly is traded in the forex market.

For an Indian trader, there is a difference between domestic and global currency markets in so far as the legal aspect is considered. However, we have covered the currency market as a whole to give you complete knowledge about currency trading.

While you may come across many alternative avenues for trade currencies, before you actually start doing so, you must be clear on the legal aspects. Although Indians can now legally trade in currencies, they can only do so in rupee, and only on exchanges authorized by the RBI.

The word “market” usually invokes the idea of a central exchange, like the Bombay or London exchanges. This is not the case in the spot forex market. The forex market is unique in that unlike other financial markets, it is neither located physically at any one place, nor is it governed by a centralised exchange. The forex market is mostly an over-the-counter, or OTC market, where all trades are transacted directly between two traders - or a trader and a forex broker. This means that there could be several different exchange rates for the same currencies depending upon factors such as the location of the traders, and the brokers being used. However, this difference will be minor as any difference worth trading for is used by arbitrageurs.  The market is run through a network of banks which also act as 'market makers by providing bid and ask prices. Trading of currencies between banks is known as the interbank market. Each of these banks trades with the other banks in the interbank market using dealing, or trading, desks. Each bank’s dealing desk is in contact with the other banks’ desks thus creating a virtual exchange floor. A number of transactions take place throughout the day which also helps in creating uniform pricing for interbank market participants. This is one major reason why volume data is not available for forex, It is also the reason why retail investors and small traders were left on the side- lines for long.

Forex derivatives, on the other hand, are traded on all major ex- changes of the world and this constitutes the currency futures market. This means that they have centralized pricing and clearing, so the market price is the same regardless of the broker being used. Currency futures markets also trade globally throughout the day from Sunday night until Friday night in the US. The volume and liquidity in the currency futures market is negligible compared to the spot forex market.