David Waring

In our last lesson we continued our course on the basics of Forex Trading with a look at the differences between an exchange traded market like the stock market and an over the counter market like the forex market. In today's lesson we are going to continue this discussion with a look at the structure of the forex market so we can learn who exactly controls the market and how the forex broker and individual trader fit into this picture.

As we discussed in our last lesson the forex market is an over the counter market meaning that there is no centralized exchange where all trades are made. Because of this, the price that someone receives when trading forex has traditionally differed depending on the size of the transaction and the sophistication of the person or entity that is making that transaction.

At the center or first level of the market is something known as the Interbank market. While technically any bank is part of the Interbank market, when an FX Trader speaks of the interbank market he or she is really talking about the 10 or so largest banks that make markets in FX. These institutions make up over 75% of the over $3 Trillion dollars in FX Traded on any given day.

There are two primary factors which separate institutions with direct interbank access from everyone else which are:

1. Access to the tightest prices. We will learn more about transaction costs in later lessons however for now simply understand that for every 1 Million in currency traded those who have direct access to the Interbank market save approximately $100 per trade or more over the next level of participants.

2. Access to the best liquidity. As with any other market there is a certain amount of liquidity or amount that can be traded at any one price. If more than what is available at the current price is traded, then the price adjusts until additional liquidity enters the market. As the forex market is over the counter, liquidity is spread out among different providers, with the banks comprising the interbank market having access to the greatest amount of liquidity and then declining levels of liquidity available at different levels moving away from the Interbank market.

In contrast to individuals who make a deposit into their account to trade, institutions trading in the interbank market trade via credit lines. In order to get a credit line from a top bank to trade foreign exchange you must be a very large and very financially stable institution, as bankruptcy would mean the firm that gave you the credit line gets stuck with your trades.

The next level of participants are the hedge funds, brokerage firms, and smaller banks who are not quite large enough to have direct access to the Interbank market. As we just discussed the difference here is that the transaction costs for the trade are a bit higher and the liquidity available is a bit lower than at the Interbank level.

The next level of participants has traditionally been corporations and smaller financial institutions who do make foreign exchange trades, but not enough to warrant the better pricing
As you can see here, traditionally as the market participant got smaller and less sophisticated the transaction costs they paid to trade became larger and the liquidity that was available to them got smaller and smaller. In a lot of cases this is still true today, as anyone who has ever exchanged currencies at the airport when traveling knows.

To give you an idea of just how large a difference there is between participants in the Interbank market and an individual trading currencies for travel, Interbank market participants pay approximately $.0001 to exchange Euros for Dollars where Individuals in the airport can pay $.05 or more. This may not seem like much of a difference but think about it this way: On $10,000 that is $1 that the Interbank participant pays and $500 that the individual pays.

The landscape for the individual trader has changed drastically since the internet has gone mainstream however, in many ways leveling the playing field and putting the individual trader along side large financial institutions in terms of access to pricing and liquidity. This will be the topic of our next lesson.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Unregistered

First of all, thanks for sharing so much knowledge with us! Great job! I would like to ask you, I want to know what is the minimum that I could start FX with. I am on disability, and I am about to get a little extra, around 250.00 Could I do something with that amount? As you can see, I am a nobody, financially speaking, as I call myself jokingly, but would like to do something about it, that I know would make me feel a lot better. Ridiculously, I only get a 762.00 check monthly and I have a lot of credit card debt, please answer my question to see if I could do something to my finances through FX. What would you suggest? Thanks a lot for your valuable time!

Tekmnd

Hi Guest,

The answer to your questions are really opinions, so you might get a different answer from each person.
Yes, it is possible to trade Forex with a couple of hundred dollars. You can trade on a Micro account, meaning that if you bought a single micro contract, you would only go up or down about $10 a day following proper money managment.

You need to look at your personal situation. It sounds like this is money that you cannot afford to lose, so that puts you in a bad start already. Almost all new forex traders lose money to start. In fact, most forex traders lose money even after they start lol.

You might try trading on a virtual account at first (it's free); they work like a real account, except it uses virtual money. It is the exact same as trading with real money, except it does not have the psychological part of risking real money (the biggest part of trading).

You might want to consider trying to pay down your credit cards before trading. The really high interest rates the credit companies are charging you will almost definitely be more than the percent profit you would make trading.

If it was me, I would commit half of your extra money to trading, and half to paying off your credit. I would save the trading half up while trading on virtual accounts until I learned a little, and while I grew to an account of at least $500-$1K before going live.

This is just my opinion, and only you can decide for yourself what works best for you.

Cheers
Tek

Unregistered

As a former stockbroker, I must say that these lessons are great. I wish David had a Series 7 study course when i took the test...lol it would have been a lot easier. Thanks David Keep up the Great work!!!!!

David Waring

my pleasure and thanks for the compliment I am glad you like the videos.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

simon

hi ,
first, i wanna say thank you for all the lessons!!and share your knowledge with us, i love it!
Here the question. im from Malaysia, and just graduated from college. i am very interested in Forex...i do a lot practice on the demo account. so ,i was wondering with the minimum of 250 USD, is it possible to earn some extra income (about 15 USD a day....?) while i waiting for my reply on job.

thanks you,
Simon

CVD

Hi Simon,

15 out of 250 is 6% per day, now i can tell you this is a very high % to make every day. Yes some days this may happen...but to keep it consistent its as good as impossible(especially when you say that you have not been trading LIVE). What you could do is start trading Live with the 250USD, and just practice until you do have enough account size to make a living out of it.

Coen

cutepixar

Great video and so far the best Forex Lesson over the internet!

amthangamani

Hi David,

I am from India, you are doing a great job in creating awareness about the forex trading.....

my question regarding who controls the fx market--- do the forex brokers like FXCM, Alpari, GFT, etc..... are providing Interbank FX price or not... and I also would be glad if you explain (in pictoral presentation) what happens when i place an order in my trade window and how it get executed....

I bet it will clearly explain the newbies how teh order get placed and executed...

Thanks in advance for reply

stalker0017

Hi Dave, hi everybody..
Thanx for all the free stuff made available on this site that is of value for many of us..
I've got an issue to clearify and would like to know your point of view on this here:
I am not sure that all those forex brokers out there are financial intermediaries, shifting our trading positions further to the actual "global forex trading system"/Interbank/whatever. Rather, they could simply be casinos/bookmakers, taking bets on how the curve will develop. To shed some light for me on this please reply do you know any forex trader who recognizes as their revenue not only some portion of the spread but also the losses taken by the (")trader("). For the bitter experience suggests that free cheese is only offerred by the mousetraps.