In this article you will learn:
- Basic information about Forex Market
- What is Forex
- What is Forex Trading
- Who participates the Forex Market
- Professional Traders and Trading for Living
What is Forex?
Forex is an acronym for ‘Foreign Exchange,’ a word used to describe the act of trading currency for another. It is one of the largest trading markets used by bankers, government, businesses, traders and investors all across the globe, to exchange and deliberate on the market value of currencies.
Also known as the ‘Currency market,’ ‘Fx market,’ ‘Foreign exchange currency market’ or ‘Foreign currency market,’ the Forex market is among the largest and most liquefied trading market in the world with an approximate average daily turnover of $4 trillion.
London, Tokyo, New York, Zurich, Hong Kong, Frankfurt, Paris, Singapore, and Sydney, are some of major Forex trading centers. These are a host of other centers located all over the world, are open 24 hours a day Monday to Friday.
Similar to the decentralized methodology adopted by the crypto-world, Forex has no centralized marketplace, as trading is administered ‘over the counter’ irrespective of your location and time zone.
It’s pretty different from the stock market which makes use of a centralized market system. The daily average market price of the Forex market is determined by the various quoted prices of all the significant banks.
What is Forex Trading?
Forex trading can be defined as the act of buying and selling currency in a bid to make a profit. For instance, you could purchase the euro when you feel the price is going low against the United States dollars, with the hope of selling it when the price increases in a bid to make some extra profit.
You also stand the chance of losing out, after buying the euro, the dollar strengthens. Hence, it’s imperative you thoroughly understand the risk and reward involved in Forex trading.
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Who Trades Forex?
There are quite a number of trading participants in the Forex market. A couple of these major players are:
1.) Banks and Central Banks
Banks are where the largest volume of currency is traded making it a key player in the Forex market. Currencies of various countries are traded through this medium and with the use of electronic networks.
Big banks elucidate the huge percentage of the total currency volume trade. Banks also run interference for clients during forex transactions. They also conduct hypothetical trades from their various trading platforms.
When banks merchandize for clients, their profit is calculated by the amount by which the asking price exceeds the bid price. Unsubstantiated currency trades are carried out in order to profit from currency fluctuations.
Central banks are also imporant players in the forex market. Their open market operations, as well as their various interest rate policies, are a determining factor in currency rates. Central banks are in charge of fixing exchange rates by which currency will trade in the open market. This is known as forex fixing. Some examples of such rates are the floating, pegged and fixed rates.
The central bank is also responsible for stabilizing and increasing the competitiveness of a nation’s economy in the forex market. The central banks in collaboration with the various government agencies and speculators have the ability to make their currency appreciate or depreciate.
For instance, during periods of deflationary trends a central bank has the capability of weakening its currency by creating surplus supply, which it, in turn, uses to acquire foreign currencies. This act reduces its domestic currency, thereby creating a more competitive exportation global market.
2.) Investment Managers and Hedge Funds
Investment managers, and the pooled and hedge funds, are the second largest players in the forex market after the banking industry. Investment managers are responsible for the various trades associated with large accounts such as pension funds and endowments.
They also have the ability to make ideological forex trades. An investment manager with an international portfolio has the capability of buying and selling currencies to foreign security nationals. The pooled and hedges funds are responsible for the proper execution of speculative currency trades.
3.) Corporations
Organizations that are into the importation and exportation of goods and services make adequate use of the forex market. For instance if a Russian company that produces solar panels imports its components from the United States of America, after which it sells its finished product in China, the Chinese yuan will have to be converted back to euros and the Russian company will have to exchange euros for dollars in order to purchase its components from the U.S.
4.) Retail Traders
The amount of trade made by retail traders is remarkably low when correlated to that of banks and other financial organizations. Owing to its rapid growth, in 2010, the retail volume had a tremendous boost with $313 billion sales. Retail traders now make use of forex brokers to trade crypto-currencies, stocks, commodities and lots more.
Forex Trading is a leveraged investment product
Forex can also be attributed as a margined, marked off or leveraged trade owing to the easy at which it enables users to use a small amount of money to control a more significant amount. What this means is; you can leverage your money for a larger amount though you also stand the chance of counting some losses. There endeavor to fully comprehend the risks associated with leverage trading before embarking on any.
Who is a professional and skilled Forex trader?
Anyone who makes adequate use of the price movement in the Foreign exchange market and makes profit in a longterm basis is an experienced and professional Forex trader. The sole objective of any Forex trader is to profit from the numerous trades as well as to maximize the numerous winning trades in the liquid market.
This is because in Forex trading when someone is making some profit, someone else is losing out and vice versa.
For a couple of people, it’s pretty difficult becoming a professional forex trader as it requires a combination of a variety of skills in order to become one.