For most, if I mention currency trading you might think that is an action reserved for the tourist or traveler; however, trading euros for dollars is not just for people looking for street money in Europe. Currency transactions are continuous throughout the day from a variety of participants worldwide. The FX or forex marketplace for currency trading is dynamic and sports a variety of players with an array of goals. Speculators, hedgers, tourists, professionals and novices all compose the diverse bag of traders in this active marketplace.
The largest global market, most liquid, and least volatile- the forex is a financial market of superlatives. The combination of active trade across major time zones and high liquidity makes the foreign exchange market an attractive arena for many traders. Daily fluctuations in currency prices are small relative to changes seen in the stock market, and the high leverage available make the marketplace a breeding ground for potential high profits.
The Futures Market
The futures market trades contracts related to movement in currencies. In this market, contracts are bought and sold over the counter between parties that come to an agreement over a specific date and fixed rate to trade currency in the future.
A lot of international companies use the futures market as a way to hedge the risk of price movements outside of their domestic market place. You can think of this as an insurance policy. Companies are able to protect their profits against potential fluctuations in the currency where their products are being sold.
The Spot Market
In the spot market, currencies are traded at the present exchange rate also referred to as the spot price. Unlike the futures market that trades contracts, the spot market is where physical currencies are exchanged. The price of a currency at any given moment is determined by a number of factors, such as the economic performance of a country, political condition, and interest rates.
Trading on the Foreign Exchange Market
If you want to enter the world of forex trading, you must open an account with a broker. Similar to other financial markets, the options provided by different brokers vary and it is important to find a broker that will best serve your needs.
Resources such as the fx-list are a great way to shop around for the broker that is most suitable to your needs and the trading you are looking to do. Make sure to look for a broker that offers the leverage you are willing to trade at.
Risks and Benefits
The forex market experiences the highest volume of trading in the world. The 24- hour time frame of trading gives this market high liquidity making it easy to come and go from the market with relatively small spreads.
Forex trading allows some of the highest leverage available in the financial markets. Different brokers have different margin requirements, but ratios of 200: 1 and up are not uncommon. This means that the capital investment you put down can be as low as 0.05% of the total money you are trading with. For example, to trade 200,000 dollars of currency you would only need to put down 10,000 dollars.
While high leverage can be accompanied by high profits it can also backfire if not used carefully. If the currency moves in the other direction from which you have bet, high leverage can result in deep losses.
Those looking to enter the world of currency trading should familiarize themselves with the different markets in which currency trading occurs along with the options provided by brokers and associated risks involved. As interest in currency trading increases, players in the market should understand the factors that make currency move and strategies for financial gains. While traders have the potential to turn high profits through high leverage and speculation, they should be equipped to assess and manage the high risks involved.