Forex trading is generally known as FOREX (abbreviation of Foreign exchange). Forex market is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world. Literally, Forex trades involves buying, selling and even holding of the currency. In other words Forex Trades is an exchange of different currencies. The main participants of the market are the larger international financial banks. Financial center around the world function as anchors of trading between the wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. However, these further include banks, firms, governments, investors and many other liquidity provider (financial establishments).
Forex trades and markets have a special and noteworthy member, namely, central banks. Central banks are responsible for managing important parameters such as interest rates, inflation in addition to their role in monitoring any money supply. Retail Forex traders are other important components that play an active and dynamic role in Forex trades.
The currencies that are the most traded include the US dollar which occupies the first place followed by the euro and yen. It must be noted that Singapore and Hong Kong are notable trading centers too and play important roles in Forex trades.
Forex trades are very exciting for those who are interested in how money flows and the effects of political issues on currencies. It is astonishing when one observes that not only the actual flow of money but even the expectation of fiscal flows can have an effect on exchange rates. Changes in GDP, interest rates in addition to expectation of inflation or change in rates can lead to noticeable effects. Thus, a career in Forex trades is a curious mix of psychology, politics, statistics and economics. One has to be well aware of the major events happening all over the world. When one thinks about how complex this can get, especially the prediction of markets in the future which is essential to most of Forex trades, one can appreciate the role of all the decision makers in Forex trades.
Thus, decision making isn’t trivial when one is involved in Forex trades, especially if you’re considering a career in Forex and currency trading. Some of the well-known techniques include visuals in the form of graphs and charts that are available in most sites dealing with Forex trades.
Candlestick charts are examples of graphs that assist decisions related to Forex trades. It essentially illustrates the way price of currency has moved in the past. It has Japanese origins and fundamentally consists of a bar and a line chart. This chart is very popular and most of the online sites that deal with Forex trades feature this figure.
Determining Forex rates depends on the type of exchange rate regime. If it is a floating exchange rate zone (that is, the currencies can vary depending on the Forex trades and market), then there exist several theories that have been developed to compute these rates. Canada, United States, Australia, Brazil are some examples of countries with floating exchange rates. Some of the concepts that can be used to find out these rates include interest rate parity (gives a relationship between exchange rates and interest rates), relative purchasing power parity (gives the relationship between rates of inflations and exchange rates trend between two countries), International Fisher effect (which claims the difference in the nominal rates of inflation determine the desired trend of exchange rates between two countries) and Domestic Fisher effect (which claims that fiscal measures don’t determine the nominal interest rate). Nevertheless, it must be noted that these concepts are based on ‘ideal’ conditions and assumptions, most of which are not witnessed in practice in Forex trades.
With the growing number of internet users and electronic means of handling and obtaining financial data, information is at the fingertips of anyone interested in Forex trades and this is a very attractive feature for most people and has led to a tremendous rise in Forex trades.
In conclusion, the idea of Forex trades is a widely used concept that has inspired many investors, speculators and even writers. There is a vast amount of information related to Forex trades available in the form of books, online articles, blogs and forums, all of which can be used to garner and collect recommendations and advices from the experienced traders.
So, understanding the behind the scene of forex trading is very easy to understand. Each currency has its exchange rate and primarily such exchange rate is used to convert it to different currency. Here is simple example of how the FX trading works.
Suppose you are an American based citizen and you are planning to visit the Switzerland on your vacation. You want to carry cash amount $500 for an emergency. Current exchange rate for the USD/CHF currency pair is 1.2049. Thus, on buying the Swiss Franc of $500 you will get CHF 602.45.
During the vacation, you don’t need a single penny to spend and hence you hold your money as an asset. And hence now you have to sell the Swiss Franc for dollars at the prevailing current exchange rate for USD/CHF when the vacation ends. Current exchange rate for USD/CHF is 1.1000. On Selling Swiss Franc you will get $547.45 making you the profit of $47.45. This shows the value of Swiss Franc increase vs. Dollars.
The details of above example can be seen in the following chart.
Foreign Exchange gives the high return with high risk. Every time the exchange rate fluctuate and thus high volatility always changes the value of investment every time.
It is common sense on the part of newbie or expert traders that FX trading does not make you a millionaire overnight. FX trading demands a lot of hard work, patience and dedication. In addition, you must be careful, prudent, and wise before shelling out money to gain profits.
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