Fx trading refers to the business of buying and selling foreign currencies as a form of investment. Traditionally, currencies were used only for the purchase of goods and services. Nowadays, currencies can also be bought and sold as well. In order to buy one type of currency, one has to exchange it with a different currency. All the world’s currencies are assigned different values on the forex market. These values are not fixed – they fluctuate in response to market conditions. Traders generally go for a currency whose value is expected to rise while offloading currencies whose values are falling in the fx market.
The forex market is highly dynamic and is always active throughout on trading days. It is by far the largest in terms of trading volume, with over four trillion dollars traded daily. It is also the most liquid and the most efficient. It is impossible for one party to monopolize the fx trading market. The market is also considered very stable and immune from recession. The values of currencies fluctuate against each other, so any time the value of one currency falls, the value of another rises.
Who participates in fx trading?
Some of the parties that engage in fx trading include multinationals, banks, brokers, arbitrageurs, hedge fund traders and retail traders. Most of these participants engage in forex trading for the purposes of making profits, but that is not the only reason for buying and selling foreign currencies. There are some market players whose aim is to hedge their funds against risk while others may need the foreign currency for other reasons. Retail traders are responsible for the fast growth of forex trading and their main aim is profit making. The forex market now attracts thousands of small time individual investors who are looking to make it big in this lucrative venture.
Thanks to the internet, the forex market remains open 24 hours a day during weekdays. Trading occurs in different time zones and the trading times overlap, meaning that the markets are usually open somewhere at any given time. Traders are able to access the markets any time of day or night as long as they have good internet connection. Trading for the day starts in New Zealand followed by Australia. The European trading session, which is centred in London, opens one hour before the Asian markets close and overlaps with the New York session by four hours. By the time trading closes on the west coast of the United States, New Zealanders and Australians are already starting a new day.
Currencies are traded in pairs, with one currency being exchanged for the other one in the pair. The relative values of the two currencies in a currency pair are represented in ratio form as forex rates. The U.S. dollar is the most traded currency and forms part of the top five major currency pairs. Other currencies forming the top five major currency pairs with the U.S. dollar include the Euro, Sterling pound, Japanese Yen, Swiss Franc and Australian dollar. In Australia, the GBP/AUD is also commonly traded as a currency pair.
Currency prices are dependent on the principle of supply and demand. If a currency is highly desired in the forex markets, its price will go up and vice versa. Whereas most currency fluctuations are small during normal trading, currency prices can sometimes change dramatically in a matter of minutes. This presents an opportunity for traders to make huge profits within a short time, but can mean huge losses as well. Forex traders must also be very good at risk management as the volatility of the markets comes with high risks.