Foreign Exchange market commonly known as the FOREX market is the largest cash market in the world where currencies of nations are traded. Currencies play a crucial role in the foreign trade and investment as it has to be exchanged while trading between two different nations. For example if you are residing in U.S. and you are importing a car from Germany, you have to pay that German company in Euros for the price of the car. It means you have to convert your dollar into Euros.
Some of us would doubt why I should convert my dollars into Euros. The answer is simple, dollar is not the locally accepted currency of Germany and therefore you have to pay the company in Euros. Similar will be the case if you are going abroad. You have to pay your expenses in the local currency of that country. For that you need to exchange your currency with the local currency of that country at the current exchange rate.
Trading in FOREX market
Lets check out how trading is being carried out in FOREX market. Usually traders buy and sell currencies simultaneously and constantly in the market. They try to make profit in the fluctuations of currency value. The fluctuations in the currency value are as a result of anticipation of traders on global macroeconomic conditions in regard to the actual monetary flows. Sometimes real-time events can even affect the FOREX market and thereby causing major fluctuations in the value of the money.
The major feature of FOREX market is that it does not have a physical exchange or location. Therefore it is available round the clock spanning from one zone to another, trading through almost all the leading financial centers of each nation. Also it is the largest cash market in the world with a daily transaction of $2 trillion.
How to trade in a FOREX market?
Buy those currencies which you think that would increase in its value comparative to the currency you are going to sell. Suppose if the value of currency which you have bought does not increase, don’t loose the hope, you can lock a profit by selling the other currency which you were previously meant to trade against.
Trading in FOREX market can be done only though an intermediary i.e. a broker. As a FOREX trader you have the sole right to choose any currency pair which you feel is going to fluctuate in its value. You can make your orders through online. Once you placed your order, the broker transfers your order to the Inter Bank Market to fill your position. Similarly when you close your trade, your broker closes your position in the Inter Bank Market. Immediately after closing your trade your account will be credited with profit or loss based on your transactions.
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