People who buy headlines eventually end up selling newspapers, and if you do not know who you are, the forex market is an expensive place to find out.
As the famous saying suggests, the foreign exchange market (commonly known as forex or FX), is profitable for only those people who possess great intellect and an ability to take risk. The FX market requires in-depth knowledge of the system and presents a fast-paced environment for the movement and manipulation of fortunes. It is one of the largest and most liquid, financial markets in the world and provides a platform for trading between commercial, investment and central banks, currency speculators, multinational companies, and other financial institutions. All of these organizations possess and follow the best forex currency trading system possible, in order to meet their specific needs.
The forex currency trading is affected by various factors like global politics, local and national foreign affairs, and the change in import and export policies. A normal day begins for FX market on Monday and ends on Friday. Unlike other financial markets, it runs twenty-four hours a day for the entire business week. The complexity of the whole process can be easily understood by considering the various aspects of foreign denomination currencies, and the social and political influences affecting the global community, which constantly keep on changing every now and then. Hence, the most highly skilled and profitable traders on the market try their hand at trading forex currencies.
What Happens in Currency Trading
The FX market facilitates trade, investment, and the transactions between currencies, such as US dollars, euros, pounds sterling, etc. The retail FX market is purely a speculative one and actually no physical exchange of currencies ever takes place. The primary function of the FX market is to facilitate the exchange of one currency into another, for different organizations. The purpose of such organizations might range from trading currencies for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity. However, these corporate needs form only about 20% of the market volume and rest of the purposes are speculative in nature, which are carried out by large financial institutions, funds or individuals. When currencies are traded against one another, each pair is represented in the form of X/Y. For example, EUR/USD refers to the price of the euro expressed in US dollars.
Components of Forex Currency Trading System
- Forex Charts: Forex charts, which might appear more like a series of crisscross lines for a layman, are actually comprehensive models of statistical information on countries, histories, national ties, and foreign and domestic events. These graphs can mark the difference between an intelligent speculator and ignorant investor. Forex charts help the investors to take the long view towards global trading and develop a comprehensive plan for investment.
- Forex Rates: Forex rates are the currency exchange rates which allow nations to exchange sums of money, for different purposes. If an individual wants to exchange money from one currency to another, he first needs to check the forex rates. These rates are dependent on the politics and economic policies on local, regional, and international levels. The forex rates also provide an opportunity to gain tremendous profits by speculation.
- Currency Speculation: Currency speculators have always been a part of major economic controversies, and their effect on currency devaluations and national economies recurs regularly. However, they make a stabilizing influence on the market, despite the fact that they are considered to leave a negative impact on the currency market. Currency speculation is, sometimes also termed, as a kind of gambling, which often interferes with economic policy. There are also many contradictory views of economic scholars, who consider speculators as people who help the enforcement of international agreements, and anticipate the effects of basic economic laws. George Soros is multi-billionaire world famous currency speculator, who made a fortune by speculation.
- Spot Transactions: A spot transaction is a one- or two-day delivery transaction, which represents a direct exchange between two currencies and involves cash rather than a contract. The delivery time depends on the two currencies which are exchanged during the transaction, and the rate of interest is taken as its current value.
- Forward Transactions: In this kind of transaction, money transfer does not take place, until some agreed-upon future date decided by the buyer and seller. Suppose a firm wants to make payments to a foreign vendor for the imports, it can choose a day and make the payments on it. The exchange rate between two currencies is decided mutually by the broker and the buyer, and it remains same regardless of what the market rates are at the time of payment.
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