The foreign exchange market is the financial market where currencies are bought and sold. We all know how the financial industry loves its acronyms, code names and jargon, so here’s another: the foreign exchange market is often shortened to the ‘forex’ market, or FX. Thought you’d like that one…
Cashing in on the forex market…
Running 24 hours a day from Friday evening to Sunday evening, the Forex market is, by far, the largest financial market in the world. It’s huge! Over three trillion dollars’ worth of transactions are made every day. Anyone can trade on the forex market, from individuals (retail investors) to institutional investors such as mutual funds. It’s also an over-the-counter (OTC) market which means there isn’t an exchange to mediate the trade proceedings between two parties.
Different currencies are presented in various different pair combinations on the forex market, for example EUR/USD. On the forex market two currencies must be bought and sold simultaneously when a trade is made. For example, regarding EUR/USD, if you wanted to buy euros, anticipating their value will rise, you’d have to use US dollars.
What’s it like to trade on the Forex market? Of course, there’s risk involved. The trades are made directly between two parties rather than through an exchange which usually regulates credit risk (the risk that parties won’t pay up). What’s more, currency values and forex prices are highly susceptible to influences such as geopolitical factors, environmental disasters, economic fluctuations and monetary policy, and they move up and down erratically at times. Traders working this market have to be able to think quickly and calmly under these pressures to minimise losses and make profits – it can often be a pressurised environment.
Traders and FX brokers at investment banks, brokerage firms, investment firms and funds will have to keep up to date with international news and industry developments in order to try and gauge the effect occurrences could have on currency values. The prime time for checking in on news for traders is first thing in the (early) morning when they first start their working day.
On the technology side of things in investment banks, there are developers and structurers that work with traders to provide software and applications that calculate prices for forex market products. Quantitative analysis roles are also popular – quants will develop pricing models for the market and support risk management. These guys will also find themselves under pressure to get results.
Back office roles such in operations, seeing that currencies are exchanged to the right parties in a timely manner and providing guidance to clients, do offer a slightly less heated working environment and more regular hours, though they generally won’t get paid as much as the front office crowd…
Show me the money!
It’s the biggest market in the world, so of course there’s the potential to earn big money working on the forex market if you’re good and smart at what you do. Take George Soros, famous for making a $1 billion dollar profit by selling short on $10 billion dollars’ worth of pounds! Okay, moves like that don’t happen every day, and profits aren’t normally as gigantic as that, but the investment bank/hedge fund industry is certainly one of the most lucrative sectors out there to work in. Technology experts and quants could earn six-figure salaries, and brokers and traders make commissions on the trades they make which could set them up with very comfortable salaries indeed.