Forex which stands for Foreign Exchange is a type of trading in which currency exchange takes place. In forex trading traders try to earn a profit by trading different currencies and gaining from fluctuations in currency values against other currencies.
It is possible for a person to trade $200,000 by investing only $2000 but forex trading is quite risky also and you can easily lose all your investment if you do are not careful in selecting the correct currency to trade in. As per BIS the estimated daily turnover on an average in the global forex market is about four trillion dollars.
The discussion on forex almost always involves details about forex terminology. There are various terms used in Forex trading which we will closely look at in the following section:
- Spot: This is a type of transaction where delivery occurs in 2 days. The features of spot transactions are that they have very short time frame, instead of any contract it rather involves cash, it is a type of direct exchange of 2 currencies and any transaction that is agreed upon does not include any interest.
- Forward: This kind of transaction helps to manage risks of foreign exchange. The special thing about forward transactions is that exchange of money does not occur till a future date. An exchange rate is fixed by buyer as well as seller for any future date. The transaction then occurs of that future specified date and the market rates during that time are ignored.
- Swap: It is a very common form of forward transactions in which buyer and seller exchange currencies & consent on reversing such transaction on a later date.
- Future: A future transaction has a contract time period of about three months and the transaction normally includes the interest amount for the contract.
- Option: In FX option the owner can but is not obligated to transact or exchange one currency for another at agreed upon rate.
About Forex Trading Participants
There are different participants in forex trading markets such as:
- Commercial Companies,
- Forex Fixing,
- Hedge Funds,
- Central Banks,
- Non Banking Forex Companies,
- Retail Forex Traders,
- Money Transfer Companies,
- Investment Management Firms.
Forex Rates and Its Determinants
The best forex rates are dependant on three main factors, which are:
- Political Conditions,
- Economic Factors,
- Market Psychology.
Political Conditions: Forex rates are greatly affected by regional as well as international political events. The rates are highly dependent on political stability of a country and also the economic conditions prevalent in a country or its neighboring country.
Economic Factors: It includes many things like economic policies, budget deficits, trends in balance of trade, level of inflation, economic growth, fiscal and monetary policies of the government.
Market Psychology: How market psychology works greatly influences the existing forex rates. The psychology is affected by flights to quality, long term trends, anchoring, economic indicators such as trade balance, inflation, money supply and different technical trading concerns.
Thus we can see that a proper analysis of the market trends and financial conditions is important if you want to succeed in forex trading. You also need to be aware of the risks of the market to properly invest and gain.