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Let take a look at an introductory at the forex market and how and why traders are increasingly flocking toward the trading.
The Forex Market (Foreign Exchange Market) is the largest financial market in the world. This is
the place where one currency is exchanged for another, and it has a lot of unique attributes that
may surprise for new traders.
Let take a look at an introductory at the forex market and how and why traders are increasingly
flocking toward the trading.
What Is Forex?
An exchange rate is a price paid for on currency in exchange for another. It is the type of
exchange that drives the forex market.
More than 100 different kinds of official currencies in the world. Most of the international forex
trades and payments are made using the U.S Dollar, Yen and Euro and other popular currency
trading instruments include the British pound, Swiss Franc, Australian Dollar, Swedish Krona
and Canadian Dollar.
Currency can be traded through spot transactions, forwards, swaps, and option contracts where
the underlying instrument is a currency. Currency trading occurs continuously around the world,
24 hours a day, five days a week.
Watch out Video for better Understanding the Forex Trading Strategies for Beginners:
Step By Step to Become a Better Trader
Who Can Trades Currency in Forex Market
The greatest volume of currency is traded in the interbank market. Here banks of all sizes buy
and sell the currency with each other and through electronic networks. Big Banks account for the
large percentage of total currency volume trades.
Banks facilitate forex transactions for the clients and conduct uncertain trades from their own
trading desks. When banks act as dealers for clients, the bid-ask spread represents the bank's
profit. Risky currency trades are executed to profit from currency fluctuations.
2. Central Banks
Central banks are very important players in the forex market. Open market operations and
interest rate policies of central banks influence currency rates to a large extent.
Central banks are responsible for forex fixing. It is the exchange rate regime by which currency
will trade in the open market. Floating, fixed and secured are the types of exchange rate regimes.
Any action taken by a central bank in the forex market is taken to stabilize or increase the
competitiveness of that nation's economy. Central banks may engage in currency interventions to
make their currencies appreciate or depreciate. During periods of long deflationary trends, for
example, a central bank may weaken its own currency by creating additional supply, which is
then used to purchase foreign currency. This effectively weakens the domestic currency, making
exports more competitive in the global market.
3. Investment Managers and Hedge Funds
Portfolio Managers, Pooled Funds and Hedge Funds make up the second biggest collection of
players in forex market world. Investment managers trade currencies for the large accounts such
as endowments and pension funds. An investment manager with an international portfolio will
have to purchase and sell currencies to trade foreign securities. Investment manager also makes
speculative forex trades. Hedge funds execute speculative currency trades as well
Firms engaged in the importing and exporting conduct forex transactions to pay for services and
goods. Example: German solar panel producer they import American components and sale is
made, the Chinese Yuan must be converted back to Euros. The German firm must exchange
Euros for dollars to purchases the American Components
Companies’ trade forex to hedge the risk associated with the foreign currency translations. The
same German firm might purchase American dollars in a spot market, or enter into a currency
swap agreement to obtain dollars in advance of purchasing components from the American
company to reduce foreign currency exposure risk.
The volume of trade made by Retail Investors is extremely low as compared to that bank and the
financial institutions, but the forex market is overgrowing in popularity. Retail investors base
currency trades on a combination of fundamentals and technical factors.
Forex market participants trade currencies for very different reasons. Speculative trades -
executed by banks, hedge funds, financial institutions and individual investors are profit
motivated. Central banks move forex markets through the monetary policy, exchange regime
setting, and, in rare cases, currency intervention. Corporations trade currency for global business
operations and to hedge risk.