The Flow of the Forex Market

The Foreign Exchange Market is open as long as there are banks open in one of the major markets. Since the major markets are spread out accross the planet, you can pretty much trade currency 24 hours a day for most of the week. More specifically from Sunday night Eastern time to Friday night Eastern.

Money in the FX market flows between parties as so…

The Big Boys of Currency Trading: The large banks that trade with each other and other large entities they choose to trade with. Those are large volume trades and not open to the public directly. Unlike other markets, the 4x market has no central body or exchange. Banks form their own relationships with market makers and their quotes may not be easily accessible to the public. The banks use a brokerage system, EBS (Electronic Brokerage System) to make their quotes available to each other only.

The Little Guys: Individuals, retailers, institutions and businesses around the globe do not trade directly with the large banks nor are the quotes from the EBS directly available to them. On their own they do not have the volume needed to interest them.

Come the middle man: As with most business dealings, there is a middle man in the FX Market, companies that developed relationships with the commercial banks and have access to the EBS. These markets pool together trades from many to create the volume needed to trade with the banks. The more volume they can pool together the more banks may trade with them. Most of thesemarkets accessible to the public are available online and do most of their business through their website applications.

Because there is a lack of centralization, it is possible to get different quotes and trade the same currency at a different price at the same time. For that reason, you want to be able to make sure that the broker you are using is established enough and large enough to get you the best rates out of the big banks.

Role of a Central Bank

Central banks

from wiki - National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank Read the rest of this entry »