An Introduction to Trading Forex

By: Justin Stewart

Whenever one currency is traded for another on the global market, this normally involves forex --- the foreign exchange market. It is usually referred to as the currency or FX market. It is the largest financial market in the world and involves currency trading on the following levels:

- Central banks

- Currency speculators

- Financial markets and institutions

- Governments

- Large banks

- Multi-national corporations

Over $3 trillion in trading is daily in the global forex and other related currency markets. Unlike the various stock exchanges, the forex exchange operates differently. In a stock market everybody has access to all the same pricing of the various stocks. With forex, it is divided up relevant to levels of access.

In addition to the $3.21 trillion traded daily at forex, it is estimated that another $2.1 trillion is traded in derivatives. Derivatives are another form of financial instrument and their value fluctuates depending on changes in variables that are globally related. Examples of derivatives are forwards, futures, options, and swaps. The primary function or purpose of a derivative is the reduction of risk for a speculating party.

The $3.21 trillion is broken down into the following four groups of transactions:

1.$1.714 trillion in forex swaps an OTC derivative with a short-term interest rate
2.$1.005 trillion in spot transactions purchasing one type of currency with another wherein it is done as immediate delivery rather than in the future
3.$362 billion in outright forwards an agreement between parties to purchase or sell various assets at a future point in time that is pre-agreed upon
4.$129 billion in estimated gaps in reporting

In 1972, the Chicago Mercantile Exchange introduced futures contracts that were forex-exchange traded into the existing mix of financial instruments. These are traded in much the same fashion as futures on the stock market commodities market. According to the Wall Street Journal, the volume forex futures transactions have grown rapidly since their introduction, and now equate to roughly 7% of the daily traded volume.

There are three key factors that directly affect currency trading:

1.economic factors

2.market psychology

3.political conditions

The bottom line is that, just like with anything that is bought, sold, or traded, the aspect of supply and demand rules supreme and is always what most significantly creates price fluctuations in any type of market. For the most part, one has to look at the global currency market as a gigantic melting pot, in that things are always changing and shifting, and never static. It is a mixture of numerous ever-changing events, with supply and demand factors constantly changing as well, therefore resulting in shifts of the pricing of one currency relative to another.

There is an ongoing controversy involving currency speculators, as they are the group primarily responsible for any effects on currency devaluations and national economies. On the other hand, there are those economists who insist that the speculators are one of the more important factors in that they perform the function of providing a market for what are called hedgers --- hedging removes or even cancel risk in investments.

Foreign Exchange
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