Forex market trading is one of the largest and most active types of trading in the world. Market participants consist of corporations that do business internationally and are trying to minimize the fluctuations between their currency and the currency of the country they are doing business with.
Central banks like the Federal Reserve and the European Central Bank are a large part of this market.
They buy and sell currencies in an attempt to maintain stability in their own national banking systems. Governments sometimes us currency Forex market trading, as well as financial institutions like commercial banks and other financial institutions. Individuals can trade in this market through a brokerage firm.
The foreign exchange market is also one of the most liquid markets in the world. This makes it easier for the individual speculator to trade in this arena. There are always buyers and sellers available.
Liquidity usually makes a market more in a more predictable way.
Daily turnover in the currency trading market is above $4 trillion. This is an over-the-counter market so there are many interconnections in it. It has been said that this market is an example of perfect competition.
The main location for the currency market is London. There are smaller trading centers in New York, Tokyo, Singapore and Hong Kong. Trading is designed to overlap from one center to another so that currencies can be traded 24 hours a day, 5 days a week.
Everyone is affected in one way or another by currency market fluctuations.
Changes in currency rates cause the prices of raw materials and imported goods to fluctuate up and down. This affects the price of everything we purchase. If you vacation in foreign country you will be able to buy more or buy less based on the value of the two currencies.
Some people acquire a strong understanding of how these markets move and they they attempt to profit by becoming active in currency Forex market trading. Currencies are traded in pairs. The major pairs are the euro paired with the dollar, the British pound paired with the dollar, the dollar paired with the Japanese yen and the dollar paired with the Swiss franc.
The first currency in the pair is known as the “base currency”.
It will be bought or sold using the second currency which is the quote currency. Traders will use pricing charts to plot the two currencies against each other. If we were trading the yen/dollar pair a move down means the yen is dropping against the dollar. A move up means the yen is rising against the dollar.
Speculators who engage in currency Forex market trading usually set up an account with a financial institution that supports individual traders. We review a number of Forex brokers here.
Speculators are only required to put up a small amount of the actual capital they will be trading. They will receive most of the money they trade with in the form of a loan from the financial institution they work through.
This use of leverage can substantially increase their profits or magnify their loses.
To make a profit in currency Forex market trading a speculator must accurately predict the movements of the currencies against each other. The base currency must be purchased when the value is low and the value of the quote currency is high.
Profits will be made if the values reverse on the base and can be covered. If the price of the base month is high it should be sold with a future purchase in mind to cover the position.
This is just one example of how to profit when trading on the Forex. There are other strategies that will make a profit if timed correctly.