BASICS OF FOREX

 

WHAT IS FOREX TRADING

Forex trading is the process of speculating on currency prices to potentially make a profit. Currencies are traded in pairs, so by exchanging one currency for another, a trader is speculating on whether one currency will rise or fall in value against the other. It’s said that about $5 trillion exchanges hands every day! Apart from it being the largest, most liquid market in the world, it’s also open 24 hours a day and 5 days a week.

In the past, Forex trading was only offered to large financial institutions, like banks. And, it was also only offered to large companies, multi-national corporations and large currency dealers. This is because of the large and extremely strict financial requirements the Forex market imposed. This means that individual traders and small businesses are not able to participate in this liquid market.

However, in the late 90s, Forex was made available to individual traders and small businesses. This is due to the advances in the communications technology. High speed internet made it possible for people to enter the Forex market and have become one of the best make money at home businesses.

 

   In contrast to the stock exchange, the forex market has no focal commercial center like the NYSE. All things being equal, exchanging is led electronically over-the-counter .This essentially implies that exchanging is directed between PC networks all throughout the globe, as opposed to one brought together trade. The biggest monetary focuses are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

 

 WHO ARE THE PLAYERS IN THE FOREX MARKET

CENTRAL BANKS         

Central Banks play a crucial role in the Forex market. The interest rate policies of the Central Banks influence the exchange rates to a large extent. They take action in the Forex market to stabilize and pump in the competitiveness of that country’s economy. Moreover, they participate in the currency exchange to manage the country’s foreign exchange reserves.

COMMERCIAL BANKS

Banks facilitating transactions for retail traders (you and I). When a bank does this they are also called a “dealer” and they facilitate client trades through a trading desk, where the bid-ask spread is their profit. Banks have got the biggest pockets out there and trade with considerably large quantities of lots. Due to this, they partially determine the exchange rates of the currencies as well. 

 INVESTMENT MANAGERS AND HEDGE FUNDS

After banks, portfolio managers, pooled funds and hedge funds are the second largest players in the Forex market. Investment managers trade currencies for large accounts such as pensions. If the manager is managing an international portfolio, he/she will have to buy and sell currencies in order to trade foreign securities. Hedge funds also execute speculative currency trades.

CORPORATIONS

Corporations that engage in international trade (importing and exporting) conduct trades in the Forex market in order to pay for goods and services. An American company might buy parts from China and then sell the end product to Germany. When the American company buys from China it must convert dollars for yuan just as the German company must convert euros for dollars to purchase the end product. Every time this happens, a transaction is made in the Forex market

RETAIL TRADERS (YOU AND I)

Last but not least, is YOU AND I .We make up a very small percentage of the market compared to the other institutions. Although small in size, retail trading in the Forex market is growing at a rapid pace. In fact the Forex market is the fastest growing market at the moment for retail trading.

In this age of the internet and trading platforms such as Metatrader, you can join these guys and make a good professional trading career while at work or relaxing at home.