Foreign Exchange Markets: Trading Brokers and World Currencies

In the world of finance, there is no central location that governs activities in the foreign exchange market. However, the market’s best forex brokers are still able to offer access to transactions of various forms, values, and sizes. Essentially, these transactions are conducted in ways that allow for the simultaneous buying and selling of particular currency pairs. For example, the U.S. dollar can be sold for an equivalent number of euros or an equal value denominated in Australian dollars. In practice, these types of trades in the foreign exchange market are based on a value determined by all national banks.

Ultimately, it is the world’s central banks that control the supply, inflation, and interest rates that are associated with each of their respective currencies. All foreign exchange transactions are based on the simultaneous buying and selling of two different currencies. In other words, an investor will buy currency A, while selling currency B. Both of these currencies undergo dual transactions, and this is why they are referred to as currency pairs. Depending on the direction of the transaction, one currency is the base currency and the other is referred to as the quote currency. As a deeper example, let’s assume a trader has Australian dollars and intends to convert these holdings into New Zealand dollars. If the AUD/NZD currency pair is trading at 1.10, this investor could convert 100 Australian dollars to 110 New Zealand dollars.

In this case, the difference between the bid price and ask price is referred to as the spread and this is essentially the trading cost that is associated with most currency trades. When using simple foreign exchange trading strategies, the pip spread in the previous scenario is relatively low and the trade works as a representation of the price changes in the currency pair. This standardized measure helps protect investors from massive losses in many cases. Overall, the effect that a one-pip change can have on a currency pair is usually very small but this depends on the amount of quote currency included in each trade.

Because of the potential for volatility associated with the trading, it should also be understood that there is an enormous risk involved when investors enter into any financial market. For most traders, short-term losses might not be the main concern, however, it is important to have a proper understanding of how changes in the value of various currency pairs can occur in the market. Numerous banks, spread across different locations run the exchanges that drive the forex market. However, there are four major forex trading centers: London, New York, Sydney, and Tokyo.

Three forex market types exist:

1. Spot foreign exchange market – trading occurs in real-time and the best possible price rates.
2. Forward foreign exchange market – trading occurs based on a contract with a set date that describes when that trading transaction will occur.
3. Futures foreign exchange market – trading in these markets involves a legally binding trading process that occurs at a set price at a set date.

There are many market players within the forex market, such as commercial banks and companies, central banks, investment management firms, retail forex traders, and money transfer companies. Also, there are different categories that characterize the currency pairs: major pairs (make up a large percent of the global market e.g. EUR/USD, AUD/USD, etc.), minor pairs (major currencies against each other aside from U.S. dollar), exotics (major currency and a small currency), and regional pairs.

Unlike the stock market, investors do not need the same entities in order to help with trading. Anybody can trade in the foreign exchange markets by themselves, although investors need a very thorough understanding of the inner operations in order to be successful. Trading platforms provide access to the currency market and this application can be customized by each trader. An expert forex trader makes predictions as to where different currencies are heading and buys and sells with the intent to make a profit. Analysis of currencies, countries, and different economic indicators helps forex traders determine which currency to buy or sell.

Although, this requires an in-depth understanding of the market. However, the market is favorable to the trader if you can make massive gains with low capital outlay while limiting potential loss. After determining which currencies you intend to buy (base currency) and sell (quote currency). These investments are usually based on individual speculations and indicators, the base currency should rise in value so you can sell it back at a higher price. If you are intending to learn more about trading, you’ll want to avoid the common difficulties (pros and cons, the good and the bad) so that you can carefully access these markets in a secure fashion.

Pros of Foreign Exchange Trading

1. There is a large number of options because the foreign exchange market is the largest financial market in the world.
2. Everyone is able to open an account and begin trading.
3. Foreign exchange is associated with low transaction costs.
4. High liquidity levels given the number of global currency transactions each day.
5. Very difficult for insiders to manipulate market prices and this helps ensure security in investment portfolios.

Cons of Foreign Exchange Trading

1. Market volatility could easily move in surprising directions, even with careful calculations and research analysis. Investors can easily make losses and gains because the market is a two-way street.
2. Lighter governmental regulations, given the common nature of foreign exchange trading transactions seen globally.
3. Developed knowledge is required before any investment decisions should be made when beginning in the early stages.

As easy as it is to enter the foreign exchange market, it is just as easy to experience disappointments due to losses incurred as a beginner. But it is important to understand the market and know that there will be losses at some stage in the future. The biggest players are often safer as they control most of the market, so if you are a beginner, try your knowledge on smaller trades, and build experiences as you go. You have probably heard these words a million times, but it is a great idea to conduct your research before beginning with these markets.