Forex Trading - You Can Master The Market

By Author: Samantha Dale
Total Articles: 610
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The foreign exchange market or Forex, is a global, decentralized financial market involved in trading currencies. It is a huge system and the average daily transactions are to the tune of $4 trillion. It is a highly complex system and to master the market will take years of experience. The first things to do to master the market, is to know what the basics are and how it works.

The Forex market assists in international trade and commerce by enabling currency to be converted at the prevailing exchange rate. In the 70’s government restrictions on foreign currencies eased and countries switched to the floating exchange rate rather than a controlled rate. A developed country with a stable polity would have a currency with a relative high value viz a viz other currencies and it would only fluctuate within a narrow band. On the other hand a country such as Zimbabwe saw its dollar plummet in value.

There different levels of access to the Forex market. The largest trades are carried out in the interbank market and this consists of the largest group of commercial banks and security traders. In this market the difference ...
... between the bid and ask prices are razor sharp and as you go down the pecking order the difference between the bid and ask prices widens.

Currencies are traded against each other using a currency pair, which is treated as an individual trading product. The ISO 4217 International Three Letter Code is used for the trade. E.g. the quote EURUSD = 1.3547 means this is the price of one Euro expressed in US Dollars i.e. 1 Euro = 1.3547 US.
The major players in the Forex market are:
• Banks
• Commercial companies
• Central banks
• Hedge funds
• Investment Management firms
• Retail foreign exchange traders
• Non-banking foreign exchange companies
• Money transfer/remittance companies

Some of the Financial Instruments used in Forex trading are:
• Spot transaction: It is a two day delivery transaction.
• Forward Contract: Money does not change hands immediately but at an agreed future date.
• Foreign exchange swap: Here two parties exchange currencies for a certain amount of time and agree to reverse the transaction at a future date.
• Futures: These are standardized forward contracts and usually are for 3 months.
• Foreign exchange option: It is a derivative which gives the owner the right but not the obligation to exchange money from one currency to the other.
• Speculation: Forex trading being done on the basis of speculation to make a profit. Hedge funds are speculative trading.

There are non-banking foreign exchange companies which will permit individuals to speculate in foreign currency for a fee. However the amount of currency which can be traded will be restricted and depends on the individual. They will also give you some amount of instructional guidance. Since Forex trading is highly speculative, to master the market may take years and till such time you have sufficient experience, it is advisable to trade in small amounts. This way you can cut your losses and withdraw if the going gets tough. To master the market in Forex, you need financial acumen, a thorough knowledge of what drives the market and a gut instinct of which way a currency will move.

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