Currency Exchange ForEx – A Growing Market Phenomenon

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( — May 18, 2018) — Like the stock market, the currencies of the world are traded. This is done in a decentralized way. With currency trading, you can get your hands on the money whenever you need it.  Currency trading exists worldwide. The trading volume on an average is more than USD 5 trillion.  This is so much bigger than the entire world’s stock markets and we can’t even begin to compare them. This market is known as the Forex market, which is a blend of the words ‘Foreign Exchange’.

Profit from better rates

Foreign exchange transactions are done whenever we travel to a foreign country. If you travel to Germany, you need euros and you buy them with the currency of your country. Whenever this is done, the value of your own currency will decide the amount of the other currency you can have. This forex rate fluctuates depending on supply and demand. And the rate changes constantly. Take any currency, perhaps the rupee. A rupee today may buy you 0.012 euros. On another day it may fetch you 0.014 euros. You may think that this is an insignificant difference but if you look at it on a larger scale it is a much bigger one. For example, it would adversely affect an international company having to pay its overseas employees. In both the individual and the company’s’ case, it would be mor,e profitable to wait until the rate is better.

Characteristics of the trade

You can trade in foreign currency just as you trade in the stock market. You can do this depending on how much a currency is worth or on speculation as to its future value. Unlike stocks, however, in the currency market, you don’t move in one direction only.  It all depends on whether the currency will increase or decrease in value. It is not difficult to find other traders willing to buy from you when you want to sell your stock and vice versa. This is because the market is so big. There are a number of indicators on which you base your transactions. If it is known that a country is lowering the value of its currency to boost export and you feel that this is going to continue for some time, you might want to sell that country’s money and exchange it for another, maybe the euro. The more the currency of that country loses value the more the euro will gain value and the more profit you will make. But it could also go the other way. The currency you are selling can go up in price while you are selling. In that case, you will lose money and it would be better for you to end the transaction.

Foreign exchange transactions are always done in twos because you are exchanging one currency in the for another. Take, for example, the EUR/USD which are the currencies that are most traded, The euro which is the first currency in the pair is called the base. The other currency, the USD, is known as the counter. The price you see will be the price of one euro for one US dollar. There will always be two prices: the price of the purchase and the price of the sale. The variation between the two is known as the spread. The first currency in the pair is always the one being bought or sold. In the pair EUR/USD, if you see that the price of the euro is higher than that of the dollar, as the euro is first, you are buying EUR/USD. If the opposite is shown, then you are selling EUR/USD. For example, if the buying rate of the EUR/USD is 0.80741 and the selling rate is 0.80745. The difference is 0-4. You need to cover this amount.  Once you do that, whatever the variation is, will be your profit or loss.

Betting on margins

Prices in the currency market are quoted in fractions. The only way to make money is through margins. While trading in currency, this means that you borrow the currency of the first of the pair to purchase or make a sale of the second currency. The quantity of money is so much in this market that big banks allow you to buy and sell in this way. You have to put down the margin you need for the size of your trade. A 3000:1 leverage means you are trading $3000. But you only put aside 10 in the currency you are using. Margins do not always increase profit. Your losses can also go up. It is best to start trading with lower margins if you are new to the market.

Who are the traders?

There are many who trade in the currency market. Among them, the banks are the biggest traders. Banks trade a lot of currency between themselves electronically. Banks also assist their clients in trade and thereby make money for themselves.

Central Banks play a crucial role in the currency market. They decide on interest rates and this is a determining factor in the fluctuating rates of currencies. They also decide on the rate of the currency that will be traded. They have reasons for their actions which are to ensure the stability of their currency or to augment the competitive value of their own economy.

After the banks, managers of large funds, as for example pension funds or hedge funds, also trade in currencies. Some of them have transactions on an international level and they have to buy and sell foreign currency. They may also speculate in the currency market. Hedge Funds include speculative currency trades in their investment policies.

Big enterprises that are in the business of export/import, also trade in currency to cover costs of buying and selling. Businesses have dealt with the currency market to prevent any chance of loss that can be incurred. A company in India, for example, might purchase dollars to get them beforehand, before buying items from America. In this way, their exposure to foreign currency is mitigated.

Compared to the above-mentioned traders, trading done by individuals is considerably less. Nevertheless, the number of individuals trading in foreign currency is growing. Such traders look for indicators to trade. They look for things like the uniformity of interest rates, rates of inflation, or the expectations of upcoming monetary strategies and other points that are technical in nature.