Forex Trading - Explained

When the currencies of different countries in the world are traded against one another, the act is referred to as forex trading. This involves buying of one currency and selling of the other simultaneously. Forex is nothing but an acronym for Foreign Exchange. The forex market came into existence during the 1970's. The very purpose of such a market is to facilitate international trading and investment.

This form of trading has to be done by choosing a currency pair which is also known as "Cross". This decision is taken by the forex trader before placing the trade. He chooses that pair which he thinks will change in value. The majors in this industry are- EURUSD, USDCHF, USDJPY, and GBPUSD. "Majors" refers to those currency pairs which are most commonly traded for one another.

We can see how this trading works with the help of an example.

Suppose there is an investor called Sam. He purchased 500 Euros in January 2008 and it worked out to be $1500 USD. Throughout the year 2008, the value of Euro increased as compared to that of USD. At the end of the year 2008, the value of 500 Euros worked out to be $1800 USD. Sam chose to close his trade at this state and hence made a profit of $300 USD.

This example shows that the motive of the investor is to gain from the movement of foreign currencies. That is investment should be made when the value of the currency we buy is expected to rise as compared to the one we sell.

Majority of this Forex market is a speculative kind of a market. This market is now the largest market all across the globe with its trade crossing 3 trillion USD every single day. This market is different from the stock market .This is because in this kind of market the trade is done between the respective parties directly and is not dependent on any central exchange. Administration of trade in such a market is done over the counter, and hence is known as "interbank market".

SPOT MARKET is the most important form of FOREX MARKET. It is named so because the trade needs to be settled immediately. This in practice accounts to 2 banking days.

One, who wants to enter this market, should also be aware of the factors that influence this market. There are two kinds of analysis required for this, technical and fundamental. The technical analysis involves analyzing the market on the basis of past values in order to be able to predict the future prices with greater probability. Various strategic assessments comprise the fundamental analysis of a particular currency and is done on the basis of various parameters excluding the price action. Such parameters include the economic conditions of the country to which that currency belongs.

Trading in this market has to be done either through a market maker or a broker. Also, it is very important that you do good research to know more about forex trading before you start trading.