About Currency Trading
The Forex market is mainly based on speculation without any physical exchange of currencies. The reality is that 80 percent of trades are purely speculative based on the opinions expressed by people on economic and political situations. Only 20 percent of the market facilitates the exchange of various currencies specifically for multinational firms that regularly trade currencies.
Forex involves the trading of seven most liquid currency pairs. These are the Euro-US Dollar, US Dollar-Japanese Yen, British Pound-US Dollar, US Dollar-Swiss Franc which comprise the four majors and the Australian Dollar-US Dollar, US Dollar-Canadian Dollar and New Zealand Dollar-US Dollar which are the three commodity pairs.
Every currency has a value in relation to other existing currencies and this value fluctuates every now and then. With currency trading, big quantities of currency are being purchased and sold thereby creating movements in the value and enabling profit.
The fluctuation of a currency"s value is attributed to two major factors -- real market and speculation. A classic example of a real market is when an investor or visitor converts his country"s money into the currency of the country they are buying from. Additionally, people need to purchase foreign currency which they will need to use in spending or investing abroad.
The sentiment of investors concerning money also impacts currency fluctuation. When investors feel that a certain currency will be strong or weak, they will buy or sell according to this feeling. This is termed speculation and this influences a national currency and eventually, a country"s economy.
Foreign exchange is not controlled by any governing body. Self regulation among traders is what controls the market. Trades take place directly between participants based on credit agreements. Participants only compete with each other and they also cooperate with each other.
Previously, the Forex market only had big multinational companies, financial institutions and hedge funds as major players. However, with the advancement of technologies in the recent years, the market has provided opportunities to all types of investors. In fact, thanks to the internet, retail traders can now take part in currency trading.
Compared to other equity trading such as the stock exchange and futures, currency trading has far more benefits. Firstly, the spreads of foreign exchange are very low which translates to a low cost to the trader. Secondly, the trader can earn huge profits on a certain exchange as the currency market"s volatility is very high. And thirdly, the ration of volatility to spread is higher for the currency trading market estimated at 500:1 compared to stock exchange at 100:1.
Another important aspect that investors need to know is that no commissions can be gained from the Forex market. Being a market based on principals only, Forex firms involve only dealers and not brokers. Dealers don"t charge commission as they earn profits through the so-called bid-ask spread.