An
Introduction To Currency Trading In The Forex Market
|
|
 |
|
There
are many markets: markets for stocks, futures, options and currencies.
These are probably the most accessible markets for everyday traders
like you and I. People easily understand the basics of trading shares.
People usually begin trading shares first, then move on to trading
currencies.
If you do not know a lot about currency trading, let’s
introduce
it to you. Currency trading is believed to be one of the best markets
to trade in because of its efficiency. The transaction costs to execute
a trade are minimal and most brokers provide you with the tools and
data you need to make your trading decisions, usually for free. The
market is open 24 hours a day which allows you to design your trading
hours around your daily commitments. It is very volatile, which is
great for those people who are looking for day-trading opportunities.
The foreign exchange market is the market in which currencies are
bought and sold against one another. People may loosely refer to this
market under different labels, including foreign exchange market, forex
market, FX market or the currency market.
The foreign exchange market is the largest market in the world, with
daily trading volumes in excess of $1.9 trillion US dollars. All
transactions involving international trade and investment must go
through this market because these transactions involve the exchange of
currencies.
It is the most perfect market that exists because it has a large number
of buyers and sellers all selling the same products. There is a free
flow of information and there are little barriers to participate.
The currency exchange market is an over-the-counter (OTC) market which
means that there is not one specific location where buyers and sellers
can actually meet to exchange currencies. Instead, transactions are
conducted by phone, fax, and email or through the websites of brokers
who specialise in currency trading.
The major dealing centres at the time of writing are: London, with
about 30% of the market, New York with 20%, Tokyo with 12%, Zurich,
Frankfurt, Hong Kong and Singapore, with about 7% each, followed by
Paris and Sydney with 3% each. Because of the fact that these centres
are all over the world, foreign exchange traders can execute
transactions 24 hours a day. The market only closes on the weekends.
The five broad categories of participants are: consumers, businesses,
investors, speculators and banks - commercial, investment and central
banks.
Consumers, including visitors of countries, tourists and immigrants, do
need to exchange currencies when they travel so that they can buy local
goods and services. These participants do not have the power to set
prices. They just buy and sell according to the prevailing exchange
rate. They make up a significant proportion of the volume being traded
in the market.
Businesses that import and export goods and services need to exchange
currencies to receive or make payments for goods they may have bought
or services they may have rendered.
Investors and speculators require currencies to buy and sell investment
instruments such as shares, bonds, bank deposits or real estate.
Large commercial and investment banks are the 'price makers'. They are
the ones who buy and sell currencies at the bid-and-offer exchange
rates that they declare through their foreign exchange dealers.
Commercial banks deal with customers on one hand, and with the
inter-bank or other banks, on the other hand. They profit by utilizing
the bid-and-offer spread. The bid price is the exchange rate that the
buyer is willing to buy and the offer price is the exchange rate at
which the seller is willing to sell. The difference is called the
bid-offer spread. They also make profits from speculating about whether
the exchange rate will rise or fall.
Central banks participate in the foreign exchange market in their
effective duty as banks for their particular government. They trade
currencies not for the intention of making profits but rather to
facilitate government monetary policies and to help smoothen out the
fluctuation of the value of their economy's currency.
Pound
to Euro home page |
|
|
