Introducing the forex market

Introduction

The forex market is the world’s most globally active marketplace, where trillions of dollars are exchanged daily between different national currencies. Forex transactions are essential to the daily functioning of international trade and the financing of government and corporate expenditure, so moves in forex prices are closely followed around the world. The forex market never opens or closes, instead trading around the clock five days a week.

Because of the sheer volume of transactions taking place, forex markets are normally very liquid. This liquidity – the ease at which you may buy and sell without moving the market price – is however concentrated in a few currency pairs, known as major pairs. These normally involve the US dollar or another reserve currency such as the euro or Japanese yen; they are traded continually by traders both within those countries and worldwide.

Forex market participants

Like in any financial market, knowing about forex market participants is key to understanding price movements. The forex market is a decentralised marketplace that is dominated by very large traders, who execute on behalf of major financial institutions, national governments, or international organisations such as the World Bank. Who controls the forex market in each currency at a given time will depend on who owns the most of it – very often the issuing government – and is willing to buy and sell. However, there is no single entity that oversees or controls market prices due to its sheer size.

The largest forex market participants include banks and governments and can place individual trades worth billions of dollars. Below them come large corporates with international operations, who will hold reserves of different currencies and have major forex obligations. Then come smaller businesses, wealthy individuals and family offices, who make up the wealth management market. Finally come small business and private individuals making FX deals for personal or professional reasons.

What moves currency prices?

Forex dynamics are determined by the interactions of these market participants, each trading for their own reasons and in different products. The most important participant to understand is the issuing government or central bank, as their attitude to forex markets will largely determine a currency’s trading range. Almost every currency issued today is what’s known as fiat currency, where the value is not supported by reserves of a precious metal but determined by the levels issued from a central national authority. Different central banks have differing stances on the forex market, with some currencies pegged to the value of the US dollar, some routinely devalued to promote exports, and some trading openly on the market. Traders need to be familiar with the dynamics of their chosen currency when opening positions, and they need to be aware that market movements can cause losses as well as gains to their investment portfolio.

Who regulates the forex market?

The forex market is a global marketplace and there is no single regulatory body that oversees trading activity within the market. Instead, national trading bodies are responsible for the regulation of forex trading in their region. This includes supervising market participant behaviour and ensuring all forex providers – whether they are brokers, banks, or other financial institutions – adhere to stringent standards. For example, in the UAE, the national regulatory body is the Securities and Commodities Authority (SCA), and all forex providers in the UAE are expected to adhere to its operational guidelines.

When does the forex market open?

Traders used to equity markets will often ask when the forex market opens or closes: the forex market takes place twenty-four hours a day, five days a week, only stopping on weekends. That said, liquidity varies according to the trading session.

The forex market operates in four main sessions: Sydney, Tokyo, London, and New York. Each session is open from morning to afternoon, in local time. Considered in terms of GMT, overnight trading is dominated by banks in Tokyo, Hong Kong and Sydney, with India and the MENA region becoming active slightly later in the early morning. From around 9:00 till 13:00 GMT London and Frankfurt are the most active markets before the East Coast of the US begins trading in the afternoon.

At the open of the US markets, the London / New York sessions overlap is the most liquid period of the day, and it takes place from around 13:00 to 17:00 GMT. Later on, the West Coast financial centres are active for the final hours of the trading day in the US, but the market begins to quieten down. The next trading cycle is triggered when a new day begins in Australia, and the Sydney session begins.

The only time when the forex market closes is at weekends and certain public holidays.

The best time for forex trading

There is no straightforward answer to what the best time for forex trading is, simply because different traders have different goals and currencies they want to trade. However, many like to participate in trading when the forex market is active and there is high liquidity in major and minor currency pairs. The time periods when East Asia, Europe, and North America are online tend to be busier, and overlaps between sessions can result in a spike in the total volume of forex trades. The forex market is generally most active during the London / New York sessions overlap, from 13:00 to 17:00 GMT.

Why participate in the forex market?

Traders participate in the forex market for many reasons.

High liquidity

Firstly, the forex market is the largest and most liquid financial market in the world, and this high liquidity can be appealing to traders who wish to execute trades efficiently with tight spreads.

Accessibility

The forex market is accessible to traders around the world and operates 24 hours a day, 5 days a week. This provides plenty of flexibility for those who wish to trade currencies online.

Leveraged trading

Forex traders can use leverage to control larger positions with a smaller amount of capital when trading currencies, which can potentially lead to amplified profits should currency prices move in their favour. However, it is essential to remember that leverage can amplify losses as well should currency prices move against them. Therefore, leverage should always be used with caution.

Profit potential in rising and falling markets

The forex market offers traders with the potential to profit from both rising and falling markets, as traders can speculate on currency pair movements in either direction. If their predictions are correct, they can generate profits from price fluctuations.

How to start trading in the forex market

The first steps in forex trading for beginners involve learning the basics of the market and different currency types.

Major Pairs

These pairs involve the most traded currencies globally, such as the US dollar (USD), Euro (EUR), Japanese Yen (JPY) and British Pound (GBP). They boast excellent liquidity and typically have narrower spreads due to their popularity among traders and investors and are linked to the economies of major trading nations. Major pairs often serve as base currencies in other pair types. For instance, EUR/GBP (cross-currency) includes the euro (major) and the pound sterling (major). Most exotic pairs include the USD as one side of the transaction. There is also a significant overlap between major currencies and reserve currencies.

Minor Pairs

Also known as ‘cross pairs,’ minor pairs don’t include the US dollar but still have one of the other major currencies. Examples include EUR/GBP, EUR/AUD, and GBP/JPY. Minor pairs can also involve currencies from smaller or emerging economies paired with EUR or JPY. Liquidity in minor pairs is lower than for major pairs, resulting in wider spreads and potentially higher transaction costs, but still relatively high by the standards of the entire market.

Exotic Pairs

These pairs involve a major currency with a currency from a developing or smaller economy, such as USD/TRY (Turkish Lira), USD/SEK (Swedish Krona), and so on. Exotic pairs tend to have wider spreads and lower liquidity compared to major and minor pairs due to their niche market. Many exotic currency pairs involve a currency from an emerging market, but not always, as shown in the SEK example. The major currency is almost always the USD. These currencies are more volatile and less predictable than major or minor pairs due to lower liquidity.

Reserve Currencies

Reserve currencies are currencies commonly held by central banks as part of their foreign exchange reserves, including the US dollar, Euro, Japanese Yen, and British Pound. They are considered stable stores of value and are widely used in international trade and finance. Most reserve currencies are also considered major pairs, though high-value non-major currencies such as the Swiss France are also held as reserves. Typically, reserve currencies exhibit low liquidity and are tied to the economies of developed countries.

Commodity-Backed Currencies

Commodity-backed (or commodity-linked) currencies are issued by countries with economies heavily reliant on commodity exports, such as oil, gold, or other natural resources. For example, the Canadian Dollar is heavily reliant on oil exports, the Australian Dollar on metals including precious metals, and the Brazilian Real on oil and agricultural commodities. Because developing nations tend to be more dependent on commodity exports, there is some overlap here with exotic and emerging markets, though wealthy oil-exporting economies are an obvious exception.

Emerging Markets Currencies

These pairs involve currencies from developing or emerging economies like the Mexican Peso (MXN), South African Rand (ZAR), or Turkish Lira (TRY). They tend to have higher volatility, wider spreads, and lower liquidity compared to major pairs due to their susceptibility to geopolitical and economic changes. Often national governments in emerging markets exert tight control – sometimes unsuccessfully – on foreign exchange markets, leading to low liquidity and volatile price swings. Several commodity-backed currencies and many exotic currencies are also emerging market currencies.

Trading strategies

There are two basic technical strategies you need to understand as you begin to learn forex trading: trend following and mean reversion. With a few exceptions (with technical strategies impossible or very difficult for retail traders such as arbitrage), any trading system can be categorised as one or the other. ADSS traders use both mean reversion and trend following strategies to make profits, but forex traders normally prefer one over the other. Both trend following and mean reversion are forms of technical analysis, which involves using charts to determine future price moves.

Mean reversion

Mean reversion strategies aim to profit from price movements that deviate from their historical average, assuming that prices will revert to the mean. Traders employing this approach use momentum indicators like Bollinger Bands, the Relative Strength Index (RSI), or moving averages lines to identify overbought and oversold conditions. They then trade against the market, buying in oversold territory and buying in overbought, expecting a return to the long-run average.

Trend following

Trend following strategies involve identifying and riding market trends. Traders using this approach rely on indicators like MACD (Moving Average Convergence Divergence), trendlines, or candlestick patterns to determine the direction of the prevailing trend. They buy during uptrends and sell during downtrends, aiming to profit from continued price movements in the same direction, often placing the trade exit point at the next line of support or resistance.

How to start trading

Whichever trading strategy you prefer, you will need to open an account. Once you have decided where to trade forex, the logistics of opening a retail trading account are simple. ADSS offers traders access to live and demo accounts so they can jump straight into markets, with or without risking any of their capital. ADSS traders benefit from seamless execution and an exceptional range of tradeable assets.

To start trading with ADSS, you can visit our trading account registration page and fill in your personal details as required. If you are a UAE resident, you can sign up for a trading account with UAE Pass and verify your identity virtually.

Learn and improve

Opening an account is just the start: to become a successful forex trader, you will need to learn and develop your skills continuously. Fortunately, ADSS has plenty of learning resources to get you started. Traders will want to familiarise themselves with trading products such as CFDs, the basics of technical and fundamental analysis, and some in-depth knowledge about charts and charting before they can begin to trade successfully. Remember to test out new strategies on your demo account as you go; there’s no better way to learn than trading with live prices.

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