Unit
- Market size and participants: The foreign exchange market is the largest financial market globally, with daily turnover exceeding $6.6 trillion. Key participants include central banks, commercial banks, hedge funds, multinational corporations, and retail traders. Each group operates with different objectives, from hedging currency risk to speculating on exchange rate movements.
- Market decentralization: Unlike stock exchanges, forex has no central physical location. Trading occurs over-the-counter (OTC) through a global network of banks, brokers, and electronic trading platforms. This structure allows trading 24 hours a day, five days a week, across major financial centers in Sydney, Tokyo, London, and New York.
- Currency pairs and quotes: All trades involve buying one currency while selling another. Major pairs include EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Quotes consist of a bid price (sell) and ask price (buy), with the spread representing the transaction cost. Cross pairs exclude the US dollar, such as EUR/GBP or GBP/JPY.
- Liquidity and volatility: Liquidity is highest during market overlaps, especially London-New York. Major pairs offer tight spreads and low slippage. Volatility is driven by economic data releases, central bank announcements, and geopolitical events. Understanding liquidity patterns helps traders choose optimal execution times.
- Leverage and margin: Forex brokers offer high leverage, often up to 50:1 or more, allowing traders to control large positions with small capital. Margin is the initial deposit required to open a leveraged position. While leverage amplifies gains, it also magnifies losses, making risk management critical.
- Pip and lot size: A pip is the smallest price move, typically 0.0001 for most pairs. Lot sizes are standardized: standard (100,000 units), mini (10,000), and micro (1,000). Position sizing in pips and lots determines the monetary value per pip movement.
- Order types: Market orders execute immediately at the current price, while limit orders set a specified price. Stop orders trigger when price reaches a certain level. Understanding order execution and pending orders helps traders implement strategies precisely.
- Broker types and regulation: Dealing desk (DD) brokers take the opposite side of client trades, while no-dealing desk (NDD) brokers pass orders to liquidity providers. Regulated brokers adhere to standards set by bodies like the FCA, ASIC, or CySEC, offering fund segregation and negative balance protection.
- Trading sessions and overlaps: Forex trading is divided into four major sessions: Sydney, Tokyo, London, and New York. The most active overlaps occur when London and New York are open simultaneously, providing the highest liquidity and volatility. Asian session trading often focuses on yen pairs, while European and U.S. sessions see broader participation.
- Rollover and swap rates: Positions held past 5:00 PM EST incur a rollover adjustment reflecting the interest rate differential between the two currencies. Swap rates can be positive or negative, adding or subtracting from a trader's account. Long-term traders must account for these daily credits or debits when planning carry trade strategies.
Regulatory Requirement
Regulation: FCA (UK) and ASIC (Australia)
Retail brokers in the UK must comply with FCA rules on leverage caps (maximum 30:1 for major pairs) and negative balance protection. ASIC similarly restricts leverage to 30:1 and requires brokers to publish execution quality statistics. Traders should verify their broker's regulatory status to ensure fund safety.
Quick Revision
- The forex market operates OTC across global financial centers with $6.6T daily turnover.
- Major currency pairs like EUR/USD offer high liquidity and tight spreads.
- Leverage can amplify both profits and losses; margin requirements vary by broker.
- Understanding order types and broker regulation is essential for safe trading.