Forex healthy trading
Foreign Exchange (forex or FX or currency) market is said to exist wherever one currency is exchanged or traded for another. The foreign exchange market is the largest financial market in the world, and is also the least regulated one. Earlier trading in these markets was a prerogative of the large banks, central banks, multinational corporations, institutional traders and governments. But recent advancements in technology have changed the scenario and now speculators, small traders and other institutions can also participate.
Features of a forex market
Forex market is unique because of various factors. The amount of trading is of colossal dimensions. The customary daily trade in the global foreign exchange markets and related markets is more than 3 trillion US dollars. The liquidity in the market is also of gigantic proportions and so is the number and variety of traders in the market. Since currency is exchanged in a number of places, the geographical distribution of these markets is also very wide. A peculiar fact about these markets is that the profit margins are low compared to other markets of fixed income. This low margin is more than compensated for by the huge volume of trading that is conducted. Also unlike a stock market, where all participants have access to the same prices, the forex market is divided stratified into a number of levels. The highest echelon consists of the largest investment banking firms and the rest follow.
Forex trading
The manner in which money is made is fairly simple, to understand at least. Trading in this market means buying one currency with the use another currency. If the trader believes that the value of Euro is set to rise against the dollar, then he can buy Euros and sell dollars. Later, if and when the price of Euro does rise, Euros are sold and dollars are bought back. At the end of this transaction, the trader will have more dollars than he had before. Exchange rates keep on changing and this change is due to the supply and demand for the currency in question. This demand and supply is in turn influenced by political conditions, economic factors and market psychology. This is easier said than done as there is no centrally cleared market, but a number of inter-connected market places and the exchange rates may vary within a narrow range.
However these rates are very close in case the variation may be exploited by the arbitrageurs. Main Trading Centers are located in London, New York, Singapore and Tokyo. However banks throughout the world participate and trading continues at all times of the day and night (except on weekends) when Asian session ends, the European one begins and when this ends the American one starts followed by the Asian session ; so on and so forth. Another feature of the market, which is sought to be maintained, is that there is very less insider information. Exchange rate changes due to actual monetary flows and expectations of change in this flow, which is due to changes in GDP growth, interest rates, inflation, deficits or surpluses in budget and trade, large cross border mergers and acquisitions and other macro-economic deals. Important information is released to public on the scheduled dates, and therefore most people know this information at the same time. The only advantage is possessed by large banks that can see the flow of their customers order and derive the appropriate conclusions.
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