An introduction to Forex Market

15 Mar, 2016 7-min read

The Foreign Exchange market, commonly referred to as Forex or simply FX, is the largest financial market where currencies are bought, sold and exchanged one for another. Unlike, for example, the stock market, it has no centralised exchange, and transactions are performed over the counter. The participants trade with one another through a worldwide network of banks, brokers, and other financial institutions.

As a global market, Forex is open 24 hours a day, 5 days a week. The major financial centres are based across almost every time zone—in London, New York, Tokyo, Frankfurt, Hong Kong, Paris, Sydney, Singapore, and Zurich. Depending on the exchange active during a specific time, the participants distinguish three trading sessions: Asian, European, and American (more about trading sessions).

Trading sessions: Asian, European and American

In foreign exchange, currencies are quoted against one another in pairs and the price indicates how much of quote (second) currency is required to buy or sell one unit of base (first) currency.

Base currency and Quote currency

Exchange rates are driven by forces of supply and demand: currency value usually increases whenever demand for it is greater than supply and decreases if demand is less than supply. Moreover, prices fluctuate in response to economic, social, and political events that occur throughout the 24-hour trading day.

The political situation and economic performance of the countries involved also profoundly affect the currency prices. For instance, a country with a lower inflation rate will typically see an increase in its currency value in relation to the currencies of its trading partners. Inflation is also highly correlated with the central bank's interest rate: a lower interest rate can depreciate the exchange rate and vice versa.

Another tangible factor in price setting is orders from Forex market participants, which are quite diverse in the volume they generate and the influence they make.

Governments and central banks such as the European Central Bank, the Bank of England, and the Federal Reserve of the U.S. operate with the largest volumes and have the most influence on exchange rates. Central banks try to control inflation, money supply, and interest rates and supervise commercial banking systems. They can use foreign exchange reserves to intervene in the market to stabilise currency rates or achieve a specific economic goal.

The second largest group comprises major banks and bank associations that form a so-called interbank market, through which they transact with each other and determine the currency price individual traders observe on the trading platform. Since Forex is a decentralised market, you can often see that different banks offer slightly different exchange rates for the same currency. Octa clients receive the best bid/ask prices quoted from our vast liquidity pool.

How ECN execution works

Another group of Forex participants is brokerage firms that act as intermediaries between individual traders and the market. They use electronic communication networks (ECNs) to offset clients' orders with its liquidity providers, which may comprise various financial institutions. This execution model eliminates a conflict of interest between the brokerage and its client when an order is executed. An ECN brokerage, unlike a market maker, is compensated through a commission that can either be charged per each order or included in the spread as a markup (more about ECN execution).

An ECN brokerage allows individual traders to access the Forex market, which initially was the domain of large financial institutions only, and gain profit from price fluctuations. Even though daily price fluctuations are seemingly small, often less than 1%, leverage can increase the value of these movements.

Traders interact with a broker through a trading platform—software that allows them to buy and sell currencies. You can install it on your desktop computer or mobile device or access it via a web browser.

How OctaFX processes orders

When choosing a Forex broker, you have a lot to take into account:

  • Reliability
    Make sure to consult various ratings and reviews before investing. Octa acts in accordance with major international laws and regulations to provide the most secure and reliable service to our clients.
  • Execution
    Octa execution model eliminates any conflict of interest between the client and the broker: Octa acts as an intermediary between you and the real market by offsetting orders one by one with competing prices from our vast liquidity pool. You can be sure our execution speed is much less than a second, and Octa clients do not experience any re-quotes.
  • Spreads
    In general, the spread can either be fixed or floating: the former remains the same even though the price is changing, while the latter varies depending on the market situation and is normally tighter than the fixed one. Spread should be taken into account as the lower it is, the less you pay for each trade. Our tight floating spread, along with no trading commission, ensures a low cost of trading and accurately reflects what is available in the market.
  • Trading instruments
    Every trader looks for versatility: a wider range of trading instruments allows you to select a pair you are comfortable trading, leaving space for experimental trading as well. With our wide selection of trading tools, you can trade the market you are interested in (view all instruments).
  • Minimum deposit
    More important for newbie traders, accessibility of trading is also determined by the amount of the minimum deposit. Depending on the region, at Octa, you can start with around 25 USD as your initial investment. It will help you try various techniques, apply different trading strategies, and get prepared for serious trading. The maximum deposit is unlimited.
  • Funds security
    Making sure your funds are safe is of primary importance while making investments. Octa uses 3D Secure technology for Visa and Mastercard deposits and SSL encryption to protect clients' profiles. All measures taken make financial information secure and inaccessible to any third parties.
  • Negative balance protection
    The negative balance protection feature protects traders from unexpected market circumstances: if the trader’s balance becomes negative, Octa compensates it back to zero. Thus, your losses cannot exceed your deposits. The negative balance protection feature comes in handy in a constantly changing economic environment: Octa reversed our clients' negative trading balances back to zero after the Swiss franc event in 2015, while some of the brokers went bust.
  • Account types
    Choosing an account type suitable for your level of trading experience is vital to ensure you are using your trading potential correctly. Our range of trading accounts allows traders with different experiences and needs to operate their funds accordingly: trading accounts at Octa allow new and experienced traders to operate flexible investment amounts with a wide range of trading tools (more about account types).
  • Leverage
    As daily price fluctuations are seemingly small (often less than 1% of a cent), it is important to choose a broker who offers substantial leverage. The higher your ratio is, the less funds you will need to hold a position. Octa offers a flexible leverage system with the highest leverage ratio of 1:500.
  • Platforms
    Selecting a trading environment you need to consider the platform’s usability, compatibility with your device, and the number of trading instruments available for technical analysis. Octa provides you with OctaTrader, MetaTrader 4, and MetaTrader 5 platforms in almost all regions, all available in desktop, mobile, and web versions (more about trading platforms).
  • Customer service
    If any questions regarding trading occur, our Customer Support will provide you with relevant information on how to solve any problem you may have. Our award-winning Customer Support is available 24/7, and it only takes us around 30 seconds to respond.

Thanks to large daily trading volume, deep liquidity, availability 24/7, and low costs, Forex definitely stands out when compared to other markets. It allows a trader more flexibility when choosing how and what to trade, along with considerable leverage, tight spreads, and small investments.

Become a professional trader with Octa

Create an account and start practising now.

Octa