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Trading Lessons

Complete Guide On Forex Trading Market

Currencies / Forex Trading Jan 19, 2018 - 10:00 AM GMT

By: Kavinesh_A

Currencies Forex rate is highly interrelated with inflation and interest rates. It is a commonly seen phenomenon that countries with low inflation over a period of years see a rise in their currency value. This is the case because as the inflation is less, the purchasing power increases which in turn increases the currency value. Higher interest rates generally tend to attract more foreign capital investment thereby an increase in demand for the currency, but this positive aspect can be negated if the inflation remains high too. It is a widely known fact that a stable government with liberal attitude towards trade will attract more foreign investments which help to increase the currency value and the exchange rate. Another factor of importance is the balance between imports and exports. If a country gets paid more for exports than the payments it has to make for imports, the exchange rate of the country’s currency will be high.




Foreign exchange market

The real handelen op de financiële markten can be thought of as a market spread across different countries where currencies of every country can be traded. The forex market is supposed to be the largest financial market in the entire world. There is no central spot for the foreign exchange trading. The market is different from the normal stock market trading as the participants in the forex market are from different areas and different spheres. Banks, central banks, industries, investors, currency traders and even governments are important participants in the forex market. This versatile and high powered base of players makes this the market with highest liquidity. The different participants conduct their trading necessities through phone networks in the various markets or through electronic communication networks or ECNs. This is the market which determines the exchange rates of different currencies relative to one another.

Such forex trading market makes it possible for regulated trade between two nations which have different currencies. This is the only other market which remains open 24 hours a da7y. People and banks from all over the world buy and sell currencies throughout the day thus the market has to remain open all times of the day. Since there is no centralized market place, the timings do not form an issue. Only very few countries have fixed currency values. When the gold standard was discarded by countries, floating currency values became popular. Until the time gold standard was used, countries had fixed rates. The rates will change only according to the changes in gold values. Nowadays, the value of currency is determined by many other factors of which the trading in the forex market is an important one. In the present days, financial market can be divided into three main areas – Australia and Asia, Europe and America.

Trading in other country currencies

Forex trading is undertaken by individuals through dealers and also by large banks, central banks, governments, industries and investors. It can be called the backbone which holds the international trade. Buying and selling of local and foreign currencies pave way for imports, exports, loans and debts between countries. As long as the countries have varying currencies, forex market will remain the largest financial market. The currency trading directly affects or plays a role in determining the exchange rate between two currencies. When a person from a country buys a foreign currency, he is selling his local currency. This makes the local currency go surplus and increase the demand for foreign currency thereby increasing the value of foreign currency and decreasing the value of local currency. The vice versa is also true. If a non-resident buys local currency by selling his country’s currency (foreign currency), value of local currency increases and foreign currency decreases.

The traditional way of currency trading is nothing but to choose a currency pair whose relative values are expected to change and trade on those currencies. Another way in which forex market differs from the regular stock market is because the market is divided into levels. The most powerful large banks large banks and dealers in securities form the first tier. This is the interbank market where the spreads are very sharp. The participants in the level outside of the first tier do not get to know the bid and ask price details. The difference between the bid and ask price is calculated in pips. A pip is the smallest trading unit of a currency. Mutual funds, hedge funds and pension fund companies have started trading in the forex market sincerely because of the potential involved. The forex market is a highly leveraged market unlike the other exchanges. Average leverage that can be expected in the forex market is 100 to 1. This leverage means that for every single dollar invested, the control value is equivalent to 100 dollars. Forex trading is similar to trading futures or other derivatives. Spot exchange and forex futures and options on futures are common trading options.

Currency Conversion:

Price rate of a currency pair will give the answer to how much of counter currency will be required to buy one unit of base currency. The currency conversions that take place in a session of forex trading are based on this price of the currency pairs. People trade by currency conversions to make a profit. If a person starts the trading by buying Euros for 100 dollars, his objective would be to sell the Euros in other currencies so that his balance is more than 100 dollars. The extra amount is the profit on trading. It is very simple to know the currency conversion rates online. By entering the base and counter currencies, the conversion rate can be known. Currency converters are very essential not only for traders but for investors. If a person has invested in foreign currency, and the value of foreign currency decreases, the worth of investment in the local currency also suffers. In domestic markets, foreign currencies are exchanged to or from the local currencies most of the times. In domestic markets, the buying and selling rate quoted by dealers and banks are different from the published exchange rate. This difference is taken as the margin for services provided for currency conversion.

By Kavinesh

© 2018 Kavinesh - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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