The foreign exchange market (commonly known as forex or FX), is profitable only for those people who possess a great intellect and an ability to take risk. The FX market requires in-depth knowledge of the system and presents a fast-paced environment for the movement and manipulation of fortunes. It is one of the largest and most liquid financial markets in the world and provides a platform for trading between commercial, investment and central banks, trade speculators, multinational companies, and other financial institutions. All of these organizations possess and follow the best system possible, in order to meet their specific needs.
This trading is affected by various factors like global politics, local and national foreign affairs, and the change in import and export policies. A normal day begins for FX market on Monday and ends on Friday. Unlike other financial markets, it runs 24 hours a day for the entire business week. The complexity of the whole process can be easily understood by considering the various aspects of foreign denomination currencies, and the social and political influences affecting the global community, which constantly keep on changing every now and then. Hence, only the highly skilled and profitable investors in the market undertake this form of trading.
What in Currency Trading
The FX market facilitates trade, investment, and the transactions between currencies, such as US dollars, euros, pounds, etc. The retail FX market is purely a speculative one and in reality, no physical exchange of currencies ever takes place. The primary function of the FX market is to facilitate the exchange of one currency into another, for different organizations. The purpose of such organizations might range from trading for payroll, payment for costs of goods and services from foreign vendors, and merger or acquisition activity. However, these corporate needs form only about 20% of the market volume and rest of the purposes are speculative in nature, which are carried out by large financial institutions, funds or individuals. When currencies are traded against one another, each pair is represented in the form of X/Y. For example, EUR/USD refers to the price of the euro expressed in US dollars.
- Forex Charts: Forex charts, which might appear more like a series of crisscross lines for a layman, are actually comprehensive models of statistical information on countries, histories, national ties, foreign, and domestic events. These graphs can mark the difference between an intelligent speculator and ignorant investor. These charts help the investors to take a macro view towards global trading and develop a comprehensive plan for investment.
- Forex Rates: These are the exchange rates which allow nations to exchange sums of money, for different purposes. If an individual wants to exchange money, he first needs to check the foreign exchange rates. These rates are dependent on the political and economical policies on local, regional, and international levels. These rates also provide an opportunity to gain tremendous profits by speculation.
- Tade Speculation: Speculators have always been a part of major economic controversies, and their effect on currency devaluations and national economies recur regularly. However, they make a stabilizing influence on the market, despite the fact that they are considered to leave a negative impact on the market. Speculation is sometimes also termed as gambling, which often interferes with economic policies. There are also many contradictory views of economic scholars, who consider speculators as people who help the enforcement of international agreements, and anticipate the effects of basic economic laws. George Soros, is a famous billionaire who made a fortune by speculation.
- Spot Transactions: A spot transaction is a one or two-day delivery transaction, which represents a direct exchange between two currencies and involves cash rather than a contract. The delivery time depends on the two currencies which are being exchanged during the transaction, and the rate of interest is taken as its current value.
- Forward Transactions: In this kind of transaction, money transfer does not take place, until some pre-determined future date is decided by the buyer and seller. Suppose a firm wants to make payments to a vendor for the imports, it can choose a day and make the payments on it. The exchange rate is decided mutually by the broker and the buyer, and it remains same regardless of what the market rates are at the time of payment.
This form of trading is not conducted on a regulated exchange, because of which there are additional risks attached to it. The FX market was not always accessible to a regular trader, and its access was limited to banks, hedge funds, major currency dealers, and the high net-worth individuals. Later, some smaller financial institutions and the Internet, made it available at a retail level. Before stepping into this arena, it is important to plan an effective strategy to follow, which in turn will help to gain benefits from this system.