Forex Guide

In this article we will list the major players or participants in the Forex market. As it is understood in a market where hundreds of variables are involved as is the case of the currency market, a quote is the sum of different factors that affect in one way or another the exchange rate of the currencies.

Commercial Banks and Investment Banks

Several of the major players that influence the behavior of the foreign exchange market are commercial banks and investment banks. Specialists put them at a level above the Forex market which is known in the investment community as interbank market.It could be considered that it is a form of parallel negotiation which is stablished by different banks that have their own trading platforms and data access prices in a similar way as Forex investors who connect with their own Forex broker.

However, transactions between banks have a much higher level of liquidity, so that the interbank market is a high level market with transactions of many millions of dollars a day.

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Over The Counter trading refers to financial instruments trading on a different context than organized financial markets or exchanges.

The term OTC trading or OTC market can be used for contracts on financial instruments made directly between two parties and also for trading with derivative financial instruments traded through a dealer and not through a centralized market (such as the stock exhange).

For example, a futures contract is a standardized product traded in the futures market while a forward contract is an OTC product.

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What is the margin call?

A margin call is the requirement by the broker or dealer for the trader to add new funds to meet the requirements of margin required to cover their open positions in the market.

The margin call is a situation that occurs in markets in which the traders invest with margin, ie, in those in which leverage is used (Forex is the best example of those markets). The margin call occurs when the free margin in the account falls below the minimum margin required by the broker to cover the positions the trader has opened. When the margin call occurs, the investor has to increase the margin in the account, which can be done by adding new funds or by closing existing positions. If the trader does not increase the margin in the account, the broker can close positions of the trader, whether the positions at a profit or a loss. Usually, it’s the system itself of the broker that make the margin call automatically when the free margin falls below margin requirements. Thus, the broker prevents clients lose more money than they have deposited in the account.

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What is a position?

In the field of trading in financial markets, a position is a binding commitment to buy or sell a specific amount of financial instruments such as stocks, currencies, commodities or derivatives, to a certain price. The term “position” is also used in finance to describe the amount of assets held by a person, company or institution as well as the state of property of the investments of an individual or institution.

Do not confuse the meaning of “position” in the trading of financial instruments with the term “financial position”. The latter stands for “status” or “statement”, ie the balance sheet liabilities in a company to take charge of their debts and obligations.

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What is the Rollover?

Every time we trade in the currency markets, all positions must be closed within two business days. Despite this, every trader has the option to renew all his open positions easily without the need for physical delivery of the foreign exchange contracts with which he is negotiating.

For example, if a trader buys $10,000 on Monday is in the obligation to make delivery of those $10,000 no later than Wednesday of the same week, unless he want to renew the position, which is called Rollover. Currently, most Forex brokers include among their services to their customers the option of renewing their open positions automatically (the rollover is credited or debited automatically if the client does not close their positions before a certain hour) or manually, which is also known as tom/next swaps a trade for the next day of the position´s settlement.

Thus, rollovers or swaps involve the application of a credit or debit in the operator’s trading account, which is based on the positions that remain open in the market at precisely 17:00 pm EST and differentials in interest rates between the currencies that make up the pairs with which we are trading. In this case, if we have an open position in which we proceeded to sell the currency that has the highest interest rate, our trading account will be debited (the account will be charged with the difference in the interest rate applied on the total volume of the position).  But if in that position the same currency was bought, the account will be credited by the broker (the money deposited in the account is equal to the interest rate differential applied to the size of the position).

What is an overnight position?

What is the Forex Market?

The word Forex stands for Foreign Exchange and it refers to the Foreign Exchange Market. The Forex is a decentralized market which exists wherever one currency is traded against another such as financial centers worldwide, banks or any financial institution or company where currency transactions are conducted. Therefore it is the largest financial market in the world, especially in terms of daily trading volume.

In this market participate central banks, major financial banks and similar institutions, multinational corporations, governments, currency speculators (large, medium and small investors) and other market participants and institutions of all kinds. Small investors (those who speculate with relatively small amounts of money) are a small part of this market and they can participate directly by companies dedicated to providing trading services or indirectly through banks or brokers.

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