The foreign exchange or forex market is the biggest financial market in the world – even bigger than stock market with a daily volume of 5.1 triljon dollars in comparison to the stock markets 84 billion dollars. The forex market has many unique qualities that may suprise new traders. In this article we will look more at forex and the how and why traders choose this trading way more and more.
What is forex?
Foreign exchange is paid for exchanging one currency against another. That type of exchange is conducted by the forex market. There are more than a hundred official currencies in the world but most international currency exchanges are still done using either USA dollar, Japanese jen and euro. Other popular currencies are Australian dollar, Swiss frank, Canadian dollar and New Zealand dollar.
Currencies can be exchanged through spot transactions, forwards, swap contracts and options contracts if the base instrument is currency. Currency trading is done all over the world, 24 hours a day, five days a week.
Who trades forex?
There are a lot of traders in the forex market, but a lot of different types of traders also.
Most of the currencies are being traded in between banks. Different banks trade with eachother and they also do it through electronic networks. A big percent of the volume being traded is made up of banks. Banks ease forex trades for the client and perform speculative transactions. A speculative currency exchange is executed in order to get a profit from the swaying of the currency rate. Currencies may also diverse a portfolio.
Central banks that represent their countries government, are very important in the forex market. Their open market operations and interest rate policies affect currency rates largely. They answer for the price fixation of their domestic currency. It is the exchange rate order, in which they can trade in their own currency on the open market. Exchange rate orders are divided into fluctuating, fixed and verified types. All of central banks activities in the forex market are to stabilize or increase the economical competitiveness of their country.
Central banks (and speculants) may take part of the currency intervention in order to make their currency more expencive or less expensive. For example a central bank can weaken their currency by creating an complementary addition on periods of deflation orientations, that is then used for buying foreign exchange. That effectively weakens national currency , making export in the world market more competitive. Central banks use these kinds of strategies to calm down inflation. Doing that is also a long-time indicator for forex traders.
Investment manager and hedge funds
Portfolio managers, united funds and hedge funds form the second biggest assemble of traders. Investment managers exchange currencies to bigger users like retirement funds, foundations and donation funds. A manager with an international portfolio must buy and sell currencies in order to be able to trade foreign securities. Investment managers may also make speculative trades, whereas some hedge funds make speculative currency transactions as a part of their investing strategy.
Companies that are in importing and exporting, do transactions through forex trading to pay for goods and services. For example a solar panel manufacturer from Germany that imports parts made in America and sells their end product in China. After the final sales they need to exchange the Japanese jen to euros. That company has to then exchange euros to dollars in order to buy more parts from America.
Companies trade forex in order to miminize the risk that is associated with moving foreign exchange.
In comparsion to investing companies, the trades made by retail investors are much lower, but it’s popularity is growing quickly. Retail investors use currency transactions by combining the base (interest rate parity, inflation rate and money political desicions) and technical factors (back-up, resistance, technical indicators, price models).
How does forex trading shape a business?
The cooperation of forex traders is a very liquid worldwide market that affects business activities all over the world. A popular currency transport strategy shows, how market participants affect exchange rates that in turn affect global economics. The cargo transports conducted by banks, hedge funds, investing fund heads and individual investors, are designed to catch productivity differences between currencies by borrowing low productivity currencies and then selling them to buy high productivity currencies.
When the interest rates of countries with a higher productivity are starting to decrease, then trading decompresses. For example the decompressing on Japanese yen may cause Japanese investors and finance companies to move their money back to Japan. That in conclusion may bring a worldwide stock price decreasing.
There’s a reason why forex is the biggest market in the world: it gives everyone a change to possibly get a profit from the fluctuating of currency rates. There are different strategies to use in trading currencies and managing risks. There’s also different reasons why forex is traded. Speculative trades – executed by banks, financial institutions, hedge funds and single investors. Central banks move forex markets trough financial policies and sometimes currency interventions. Companies trade currencies because of global business and to manage risks. Investors get an overall benefit if they know who and why trade forex.