Introduction

Forex or the Foreign Exchange Market refers to the market in which foreign currencies are bought and sold electronically throughout the globe. When people talk about the U.S. dollar strengthening, they invariably refer to the value of the U.S. dollar in terms of another currency. Domestically, a strengthening U.S. dollar will have little effect on Americans; however, it will allow them to purchase more foreign goods because they will be more inexpensive using the buying power of a strong U.S. dollar. Internationally, a strengthening U.S. dollar will make U.S. exports more expensive, and thus conceivably less competitive.

Essentially, the Forex market is all about the value of one currency relative to another in the global marketplace. This global marketplace includes several market participants exchanging currencies all across the globe. The bulk of currency trading takes place from the major financial centers of the world including: London, New York, and Tokyo.

Forex Trading Advantages

• Unparalleled Market Liquidity - With an estimated daily trading volume over over $1.9 trillion dollars, the Forex market dwarfs the daily volume of Nasdaq, NYSE, DAX, and the Tokyo Nikkei - combined. Traders are able to enter and exit the market equickly and efficienctly as there is always a buyer or seller to offset your trades.

• The Only 24-Hour Market - The sun never sets for the Forex market because its open 24 hours a day. Starting in Australia and moving west through Asia, Europe, and finally the U.S., traders now have many opportunities and more flexibility to trade versus other markets.

• Minimal Transaction Costs - Due to the large size of the market and new technologies pushing market efficiency, there are no commissions for executing trades. Traders only pay a market spread which typically accounts for less than 0.1% (5 pips or lower). 
  

• Market Transparency - The forex market has more transparency than any other financial market. This means individual traders have the same access to information as large institutions do such as real-time news, analysis, and research whereas they couldn't under markets where transprarency could be jeopardized (ala Enron). This essentially means nobody can corner the Forex market.
  

Market Participants

Forex is made up of a diverse group of market participants. These players always keep the market moving and their approach to the market falls under one or more of the following motivations: hedging, arbitraging, or speculating. Hedgers typically seek to mitigate or manage their foreign exchange risk, speculators seek to profit from market fluctuations, and finally arbitrageurs hope to profit from market inconsistencies or price discrepencies.

• Market Makers - These are the bigger players, mainly major banks, that constantly buy or sell currencies 24 hours a day (across each banks regional locations!). They quote  their own independent prices and also a bid/ask price (two-way) with the spread making them a profit. Examples of market makers include: Citigroup, UBS, Deutsche Bank, and HSBC.
  

• Central Banks - These banks have been known to intervene in the Forex market in order to stabilize their respective countries exchange rate if needed. On occassion central banks have used their financial might to significantly influence a currency; however, as the market has grown by leaps and bounds these banks now have less control.
  

• Brokers - Also known as interbank brokers, these institutions act as middle-men between major banks (market makers) offering price discovery and anonymity along with efficient pricing. The two major electronic brokers that currently exist are EBS and Reuters.
  

• Clients - These include client banks that buy currencies for their own clients, financial institutions such as insurance companies or pension funds, hedge funds speculating in currencies, multinational or domestic companies hedging their forex risk, and finally individual traders seeking to profit.
  

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