Trading Forex Currency
Trade is basically defined as an exchange of goods or services at an agreed rate of exchange (e.g. two apples for three oranges). And in the same way that apples and bananas can be traded, currencies can also be exchanged for one another.
Foreign Exchange or Forex currency trading involves buying and selling one currency for another at a mutually determined rate. Various parties from different countries around the world participate in this process that contributes to the largest financial market in the world. With more than US$ 1.5 trillion traded each day and with the traders coming from all parts of the globe, Forex currency trading continues for 24 hours a day every single day of the year to accommodate all possible trade between different nations.
Exporters, importers, and local and international fund managers are the main participants in the trade. Banks, however, play a significant role as it mediates almost all trade. Forex currency trading has actually been dubbed as an “interbank” transaction owing largely to that fact.
The exchange rate used for trading which ultimately determines the published rates seen in daily broadsheets may depend on a lot of things. Macroeconomic indicators such as interest rates and the inflation rate can influence it just as much as political and social events like the implementation of new policies or elections results. It is due to this plus the large number of participants in Forex currency trading that it is considered the most volatile trade market – that is, compared to the securities and money markets.
On the other hand, because of the large volume of active Forex currency trading each day between more than one hundred fifty countries, it is also considered as the most liquid trade market. Based on research, the average trader would probably trade as often as ten times in one day. Now imagine millions of traders across the globe working at that rate – or even more – each day and you will definitely see trading where money flows easily at a very high turnover rate and where realized gains could be converted very easily to cash.
Forex currency trading is generally unregulated. While certain countries impose some form of control through their central banks, no single organizations governs the entire market. Central banks can only impose control in the sense that it could draft monetary policies for the country itself to protect it from huge losses in trade. Its role in how the whole market works, however, is very minimal.
Foreign governments at times participate in Forex currency trading to influence their own currency’s value. This can hardly be accounted for as a form of regulation because governments participate fairly in the market in the same way that banks and multinational firms do. To achieve a target currency value, governments either flood the market with currency or buy out currencies. The former works to devaluate the currency while the latter causes its value to appreciate. But while some experts believe this to be a sound way to stabilize a currency’s value, many economists believe otherwise, claiming that this could hardly have an effect in the long-run because the sheer volume and size of the Forex market prevents one body from manipulating even one aspect of it. Eventually, currencies will reflect its real value no matter how much governments try to manipulate them – that is just how the free market works.
As with all kinds of trade, Forex currency trading can be tricky and it takes significant amounts of research and experience to be successful at it.