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Forex Trading

What is the currency market?

Every country has its own currency. It is used as an exchange or payment unit, as a counting unit, as a cost preservation tool, and as a measure for postponed payments. Each country uses its own national currency, but transactions abroad require foreign currencies. For this purpose there are special markets, known as currency markets or Forex exchange market.

The currency market is a system of relationships based on currency purchases and sales, and serves as a means for other operations. The major function of the currency market is to provide its participants with foreign currencies and to regulate currency exchange rates. Trading is accomplished via phone and computer terminals at hundreds of banks simultaneously throughout the world. Hundreds of millions of dollars are sold and bought every several seconds, the essence of so-called currency trading.

The international currency market is called Forex (FOReign EXchange market). It is an inter-bank market created in 1971, when international trade moved from fixed currency exchange rates (forex rates) to floating currency exchange rates. The Forex’s major function is the exchange of one currency for another. The forex exchange rate of one currency to another currency is set very simply through supply and demand ratios, an exchange to which both parties agree. Essentially, the Forex exchange market makes the same type of operations as those made at currency exchange points: one currency is changed for another, or, in other words, one currency is bought by another on the Forex.

Some of the differences between bank currency exchange points and the Forex market are:

At Forex only non-cash money is exchanged.

The volume of the Forex exchange market exceeds the volume of any other market. Forex daily operations are worth around $ 1-3 trillion, about the equivalent of one to three USA annual budgets. In comparison, the US securities stock exchange has a daily volume of about $ 300 million, and the shareholder capital market daily volume is about $ 10 billion. The NYSE needs half a year to reach the daily volume of the Forex exchange market.

The Forex exchange market operates round-the-clock. Since this is an international market, Forex exchange market needs to be accessible at any time of the day from any part of the globe. Therefore, the currency exchange operations are available round-the-clock without holidays.

The Forex exchange market has no definite location. Forex is like the Internet: in different parts of the world people use different methods to communicate and to buy and to sell currencies. To accommodate these methods, Forex is not a specific organization, but rather a network that channels currencies.
International information networks such as Tenfore, Reuters, Comstock, and others distribute financial news and provide real time online information on the Forex exchange market.

The Forex exchange Market Players

There are many types of players on the currency market who often pursue varied goals in their trading activities. Although the Forex exchange market is often called a zero result game – what one investor earns in theory equals to what another loses – there are many opportunities to make money.
Traditionally, the major currency market players have been banks. They are still the largest players in terms of trade volume, but new technologies have made the Forex exchange market much more democratic. Now practically everybody has access to the Forex and the narrow, accurate prices quoted on the inter-bank market.
In addition to banks new kinds of market players have emerged over the last decade, including hedge funds and trade advisors on futures markets.
Central banks can play an important role on the currency market, but international corporations have a natural interest in the actual trade because of their exposure to risks related to the currency market.
Trade operations by individuals on the currency market have grown substantially over the last decade, and although the exact figures are difficult to obtain, it is believed that this sector represents about 20% of the currency market.

How to Profit on the Forex Market

It is well known that when exchanging currencies the buy and sell rates always differ. This difference in rates allows the bank to make a profit. That is, the bank buys 1 euro for 1 dollar 30 cents, and in the next minute sells it to somebody else for 1 dollar 40 cents. These 10 cents are the bank’s profit.

Besides, rates are changing periodically. As an example, today the bank buys euro for 1 dollar and 30 cents, and tomorrow the rate goes up drastically and the bank may sell euro at a higher price, for example, for 1 dollar and 60 cents. The bank profit will be 30 cents. This is one more mechanism for making money through currency exchange. The use of this mechanism allows not only banks or currency exchange points to make money through currency trade, but just about anyone, but only on the Forex market.

When speculating with currencies only one thing matters: buy cheap and sell for much more. This is why, in order to earn money through currency trade, you need to catch the right time when a currency can be bought cheaper, buy as much as possible of it and then find the right moment to sell it with a good profit. And this is the basis for making money on the Forex exchange market.

There are however two other essential questions:

  1. Where can a person find substantial amounts of money to make such speculative deals with profits that make it worthwhile?
  2. How do you determine when the rates will change? It may drop instead of going up. In which case you will lose, not profit.

First, when operating on the Forex exchange market, currency traders (they are often called traders) use the so called “leverage”. This mechanism allows to work with sums that are several times higher (up to 500 times!) than your real capital. For example, for a buy rate of 1.3 dollar per 1 euro, in order to buy 100,000 Euros with “leverage” of 200, all you actually need is $ 650!

Second, to predict future changes in currency rates, there are many types of analysis. Modern day traders who are active on the Forex exchange market use essentially two types of analysis: technical and fundamental.

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