Forex is one form of trading where exchange of different currencies occurs. Forex trading involves traders who attempt to make profit through trading that takes place between various currencies & leveraging from variations that exists between different currency exchange values.
The good thing about forex is that you can do trading equaling $350,000 with an investment as small as $3500. However you need to be aware that forex trading is known to be risky as well & a wrong move while trading could well result in loss of large investments thus it is important to select the right currencies to trade. The interest in this type of trading is quite high and the reason could well be understood by the fact that according to BIS it has been estimated that per turnover in forex market is as much as 4 trillion dollars.
Frequently Used Forex Terminology
A discussion about forex trading will remain incomplete if we do not mention the frequently used forex terminology. Thus we will now look at the terms that are commonly utilized while doing forex trading:
1. Spot: The term spot is used to mean trades in which delivery takes place after two days. Primary feature of any spot transaction is its time frame which is quite short; the transactions here make use cash rather than any contract and can be called as a direct exchange involving two currencies without the use of any interest amount.
2. Forward: It is a form of method which assists in managing foreign exchange risks. Main attraction towards forward transactions is because of the fact that monetary exchanges do not take place up to a fixed future date. The seller as well as buyer together set up an exchange rate for a future transaction date. Consequently the transaction later on takes place on such future date for the fixed rate instead of market rates prevalent that time.
3. Swap: Another type of forward transactions is swap where seller as well as buyer exchange currencies and then reverse that transaction on some future date.
4. Future: This type of contract is for a time period that extends up to 3 months & transaction generally consists of interest value for contract.
5. Option: FX option is a term that means owner is allowed to but is under no obligation to exchange/transact currencies for the agreed price.
Various Participants of Forex Trading
Forex trading markets includes various participants; let us briefly look at these entities:
1. Banks and Commercial Companies
2. Forex Fixing and Hedge Funds
3. Central Banks as well as Non Banking Forex Companies (NBFC)
4. Retail Forex Traders, Money Transfer Companies and Investment Management Firms
What Determines the Rates?
There are several determinants of forex rates and some of the primary determinants are political and economic conditions and psychology in the market.
Political Conditions: A major factor for changes in forex rates are international/regional political events. Political stability of a nation decides the rates plus different economic conditions present in the country plus their neighboring countries are also important factors.
Economic Factors: These consists of various things such as economic policies, deficits in deficits, trade balance value, inflation rate, growth of the economy, governmentӳ monetary/fiscal policies.
Market Psychology: Forex rate are also greatly affected by current market psychology. Market psychology in turn is influence by things like flights to quality, trends which have long term value, anchoring, economic indicators like the trade balance, money supply & lastly various concerns with regards to technical trading.
As it is clear from the above mentioned facts, a complete analysis of trends in the market is vital to your success in forex trading. Additionally it is also important for a forex trader to have good knowledge of the market risks so that right investments can be made and higher profit levels are achieved.
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