Learn about Forex and make your pip move!

18 Dec

The global centralized market for trading currencies is known as FX or foreign exchange market. As traders embark on their currency journey, they are in the same arena as large international banks and financial centers. The dealers are the banks, and perhaps several insurance companies and general financial firms. They make million dollar trades in an unsupervised market. The profits in this market overshadow the risks.

Reasons the FX market stands distinctly apart from other markets

  • The trading volume represents a huge asset class, in fact, the largest class. This leads to high liquidity.
  • The geographical reach of the FX market is unchallenged by any other market.
  • This market is open 24 hours per day with the exception of weekends. The trading week begins on Sundays and ends on Fridays.
  • Exchange rates are affected by several events.
  • Profits are better than fixed income markets.
  • Leverage is used to enhance profits and loss margins.

Because of the above factors, the Foreign Exchange market enjoys nearly perfect competition with the exception of interference by central banks. In April of 2010, the global markets grew 20 percent from April of 2007, for an estimated growth of $3.98 trillion.

The History of Currency Trading

People in ancient times helped other people change their money out, and earned a commission. Later in the 15th century, banks were opened in order to change out currencies. In 1704, agents executed foreign exchanges. Around 1850, currency exchange was operated by one firm in the United States. Modern exchange came about 30 years later because of gold. Trading was limited on the international level before World War I. The monetary system that focused on gold was later abandoned.

The FX markets actually closed around 1972 because of the faulty Bretton Woods Accord and Europe’s Joint Float. World events, such as additional available currencies, the Bank of China’s decision to allow domestic businesses to participate in FX trading and South Korea’s choice to let go of the Forex reins, led to the market’s revitalization.

Lesser known facts about the foreign exchange market

  • Foreign exchange fixing – The day by day exchange rate is fixed by each country’s bank. The set rate helps banks evaluate currency behaviour, which is used as a trend indicator. A rumour that the central bank of a given country is planning a foreign exchange intervention could be enough for a currency to become stable, however, there are regimes in which aggressive interventions are held several times in one year.
  • Transactions in the FX market are speculative in nature because the movement of currency cannot be accurately predicted because buyers and sellers in the foreign exchange market have no plans to hold onto their currencies. Since 1996, hedge funds have played a vital role in aggressive speculation, and control billions in equity. They are able to borrow billions as well and redirect central bank intervention.
  • Consumers often use investment management firms for large accounts, pensions and endowments. The firms use Forex to manage foreign securities. For an international equity portfolio, firms will buy and sell foreign currencies to fund the purchase of foreign securities. Some firms also have currency overlay, which means they manage the exposure of their clients’ currency with the goal of making profits and limiting risk.
  • Retail traders in the foreign exchange segment operate through banks and brokers. The retail side is growing and top forex companies are making themselves known to investors around the world. Japan is one such country enjoying quick and easy access to online trading on a day to day basis.
  • There are also companies in the FX market that are not banks, and they receive payments in currency exchange.

This article is contributed by TraderXP – UK’s leading Binary Options Stock Trading broker

No comments yet

Leave a Reply