On a daily basis currencies around the world are traded back and forth. This is known as currency trading or the foreign exchange market (Forex) It is a multi-trillion dollar market. Forex trading can be done by individual retail investors, corporations as well as financial institutions. Placing retail currency trades is usually done through brokers and other market makers. The brokers will place the trades on the corresponding interbank market.
Forex Trading Is Unique
Currency trading is not like trading stocks, mutual funds, options or futures. It does not happen on a regulated exchange. Forex trading is not controlled by any type of a central governing body. There are no clearing houses to guarantee the trades. No arbitration panel is available to adjudicate any disputes that may occur. The trading is done based on credit agreements. It is the largest market in the world. It also is the only one that works with just a metaphorical handshake. It is possible for the Forex market to succeed in this way because participants need to compete, but also cooperate with one another to earn a profit. The self-regulation of Forex trading has proven to work well.
No Limit On Position Size
Forex trading is different from stocks. There are no limits on the size of an investor’s position. It is possible for someone to sell $500 million worth of currency if they had sufficient capital. This type of trading can also be done using non-public information.
Currency Values Change
When investors are able to anticipate the changes in currency values, they will be able to make money with Forex trading. Currency values around the world change for a number of reasons. Everything from a shift in the political climate of a country to economic news as well as the flow of international business and more will impact the value of a country’s currency. When one country is importing large amounts of products from another country, the currencies of these two countries will need to be exchanged.
Purely Speculative Market
With Forex trading, there is no physical exchange of currencies that takes place. Every trade only exists as a computer entry. These trades are netted out based on market price. All profits and losses associated with currency trading are calculated in dollars. They are then recorded in a trader’s account. A large portion of the trades in the Forex market is by big corporations and financial institutions. Individual traders make up a small percentage. It is a market that is heavily influenced by daily geopolitical events happening around the world.
Currency trading comes with a high level of risk. Currencies are extremely volatile when compared to other types of investments. Many experienced currency traders believe the key to success is using a conservative risk management approach. This type of risk management has a number of different components to it. When a person wants to participate in Forex trading, it is often recommended they have a trading plan in place before making any currency trades.