Market Structure Forex

Posted by: Freddie NorthJuly 16, 2021 Updated: July 16, 2021

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This post is also available in: Indonesia Português

No market compares with Forex in terms of size. Every single day, over 5 trillion US dollars circulate between traders, both retail and institutional. But how exactly is this gigantic financial ecosystem structured? Discover the fascinating Forex market structure making this 13-digit turnover possible. Here is a look at some thrilling intricacies of the most accessible and popular monetary marketplace in 2021.

Currencies vs. Stocks

what is market structure in forex

Understanding market structure Forex is easier if you know what happens at the stock exchange. What makes this market drastically different is its physical center. The structure is centralized, so it is essentially monopolistic. Its drawbacks are impossible given the market structure Forex has. The biggest disadvantage is the pricing mechanism.

The exchange controls the prices shares are traded at. There is only one entity at the core. It processes all equity trades. Consequently, prices may be changed in the interests of the provider and at the expense of traders. Here is how.

Clients place orders, and these are fulfilled by market specialists. Now, suppose there are more sellers than buyers. What is going to happen? The employees get stuck with all these shorting orders. There simply aren’t enough buyers interested in the asset.

To resolve the issue, specialists may play with the spreads, making them wider or ramping up transaction costs. These measures are designed to prevent even more short positions from accumulating. Thus, quotes are changed to accommodate the needs of the intermediaries. Now, let’s see what happens in the Forex market structure.

What Is Market Structure In Forex

how to read market structure in forex

As you may know, Forex is a decentralized environment. There is no physical hub, and the marketplace is classified as OTC, or over-the-counter. But what exactly does this mean for buyers and sellers? An opportunity to connect directly using the Internet and take profitable action. 

Particularities for traders depend on whether their broker is an ECN or a market maker — i.e., the structure of trading costs. However, the big picture is more important. Here is the Forex market structure explained.

Currencies are traded online without any monopolistic center. While the New York Stock Exchange charges a particular price, this does not happen in the fx industry. Electronic platforms connect users to different providers of liquidity, so they have access to the most attractive quotes. Meanwhile, every dealer sets their own pricing. This is the basic principle underlying the trading Forex market structure. 

The variety of quotes is exactly what makes Forex so incredibly fascinating. This market is truly gigantic, and rivalry between dealers is fierce. This means you are given the best deal almost every time. Besides, traders are not tethered to their laptops. They can make money from a tablet or smartphone, wherever they are. Clearly, the Forex trading market structure has its benefits.

Traders make money from different strategies, fundamental or technical. You choose a comfortable pace. Long-term methods (e.g., swing trading) allow you to leave a position open for days or even weeks. The quickest Forex scalping strategy brings profit to those who monitor the market and track correction during the day. 

Scalpers focus on a long series of modest profits. In comparison, swing traders concentrate on large market movements. There is no universal recipe for huge ROI: choose an approach that suits your personal goals and preferences. You may even delegate the job to a strategy manager and watch them make money for you. This is known as copy trading. Learn how to read market structure in Forex below.

How to Read Market Structure in Forex

You may suppose such a decentralized colossal market must be chaotic. However, it has its own specific order. So, what is the market structure in Forex? All market participants are organized into a hierarchy that may be described as a pyramid or a ladder. Now, we should look at each level or rung, starting from the top.

The Top: Interbank Trading

The interbank level is the highest in the structure of the Forex market. It comprises the biggest banking institutions globally, and the participants connect bilaterally — i.e., directly with one another. Alternatively, they can do it through voice or electronic brokers. EBS Market and Reuters Matching are notable rivals in this regard. 

Brokers are constantly vying for new clients. They try to expand their market share by offering attractive conditions. Clients trade most currency pairs, but their liquidity varies. It is easier to buy or sell some combinations more than others. Generally, majors and minors are the most popular choices — e.g., EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF. The range depends on the platform.

Banks at the top of the system can view each other’s quotes, but this does not mean they are used for actual trading. Pricing depends on other factors including the credit relationship between the parties involved. This is similar to taking out a loan. The cleaner your credit history and the higher the score, the better the interest rate offered to you.

Brokers and Businesses

On the next rung of this ladder, you will find major corporations, hedge funds, retail ECNs and retail market makers. All these participants transact through commercial banks. This means the rates are slightly less favorable than in the interbank market. But what about retail traders? 

Forex Regulation Around the World

Retail FX Trading

Over 13 million individuals make money using software, from the comfort of their homes, or even on the go. Such participants gain access through retail brokers. This places them at the very bottom of this global hierarchy. However, this does not mean you cannot get a big piece of the pie. Profits may be substantial, even if they are tiny in comparison to multi-billion institutional trades.

Until the 1990s, the common folk could not buy or sell currencies online. Since then, a lot has changed. Thanks to the rapid technological advancement of recent decades, electronic trading is now accessible to everyone. Brokerage services allow individuals to overcome difficult barriers to entry. Now, you may start trading with a modest investment that looks laughable compared to institutional volumes.

The Bottom Line

understand the Forex market

Understanding Forex market structure is important, as you should know the rules of this financial environment. Forex is more than a chance to make money from a smartphone. It connects you to a truly colossal financial system. Currencies are traded 24 hours a day, from Tokyo to New York. This market rarely sleeps. 

The structure of the international Forex market also tells you about the best times for entry. Trading takes place in four financial hubs five days a week. When these sessions overlap, the market sees the highest activity, liquidity, and volumes. Analysis of these intervals in the Forex market structure will help you pick the most profitable period for your currency pair.

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