Are you thinking of getting into the forex trading?
Or maybe your curiousity is piqued after hearing it mentioned many times from friends who are already
into it, workmates, just plain acquaintances at a dinner party.
Some things you need to know though before jumping on board, like what is it? How does it work?
Foreign exchange trading, also known as forex or simply FX, is the practice of buying and selling
of one currency, according to its established value against another currency.
Say for example, your currency is in Euro and you buy US dollars while its value is weak, and speculating
that sooner or later its value will rise and by reselling it, you would have made some profit.
The established value of one currency to another is called exchange rate, which may rise or fall anytime.
Since forex trading is a worldwide market in which governments, national and central banks, hedgefunds,
corporate companies, various financial institutions, brokers, and the so called currency speculators
all participate, it means that someone is always operating in the market 24 hours a day except on
weekends (from 5pm EST on Sunday until 4pm EST Friday), causing the exchange rate to change at any time.
The average daily trade of the global forex market is currently up to the astounding amount of US$4 trillion.
What makes forex trading unique is, eventhough profit margins are low, profit can be high all the same due
to the market trading in volumes, meaning trading in huge amounts.
Currently, there is no such thing as a physical central market for forex trading since it is an OTC (over-the-counter)
market.
But there could be one in the future, for example the joint venture of the Chicago Mercantile Exchange and Reuters,
called FxMarketSpace opened in 2007 in a bid to become a central market clearing mechanism.
While waiting for this to become a reality, however we will have to settle for interconnected marketplaces
where several currencies are traded (USD, EURO, Japanese Yen, Swiss francs, and Pound Sterling amongst the most
traded currencies).
The lack of centralization also implies that there is no such thing as a uniform rate but rather a number of
them, depending on what bank, what market or which broker.
Although in practice these rates are rather very close.
Like all financial markets in the world, forex trading is affected by several factors.
One, not surprisingly, is speculation.
It has affected the forex market heavily in the last twenty years, that 99% of the transactions made
in the market are based on pure speculation.
There’s also market psychology, political factors, and economic factors like house prices, employment figures.
But for someone who wants to get into the forex trading minus the hassle, one can always turn to already existing
forex experts who supply investors with daily forecasts and charts.