The trading in currencies taking place in different countries is known as forex or foreign exchange trading. Here goal of every trader is to maximize his or her earnings using the variations that occur in currency rates. Forex trading provides good opportunity to earn in multiples of what is invested but comes with its own risks and uncertainties. A good forex broker tries to reduce risks that are part of trading and improve chances of earnings.
Different parts of forex market
Forex market constitutes many different things such as spot trading, forward and swaps transactions and future contracts. We will try to give you some insight on these different things which are part of the market and how important they are in foreign exchange trading.
To start with we explore spot transactions where the transaction completes in maximum two days. A can be guessed by the name, these transactions are of short duration, the transaction takes place in cash and it is one form of direct exchange. On the other hand forward transactions are totally different and here the transaction takes place on a future date on a prefixed rate and the rates on that future date are not used. This has become an effective method used by forex traders to minimize losses due to adverse rate fluctuations.
Next we look at swap and forward contracts. In swap which is a kind of forward contract the concerned parties do a transaction and consent upon reversing it after a specific time interval. On the other hand future transactions have a set time period such as three months and required interest amount also becomes due for the set time period.
Constituents of Currency Market
As can be judged from the scale of trading that occurs in forex markets, there are several constituents of currency market and play their role in deciding the rates. These constituents include NBFCs, commercial firms, banks, money transfer agencies, hedge fund firms, investment management companies, retail forex traders and several companies involved in forex fixing.
How the forex rates are decided?
International forex rates are decided based on many different factors which are political, economic and psychological.
In political conditions things like regional as well as international events, political stability and political conditions in nearby countries have their role in how forex rates behave.
Similarly various economic variables like trade balances, deficits, inflations, fiscal policies, economic policies and monetary plans of the government result in changes in foreign exchange rates.
Lastly, market psychology has its role in how the rates change and the market psychology gets affected by numerous things which includes flight to quality, anchoring and similar other factors.
The above sections must have helped you gain some knowledge about what forex trading is and how it works. The article has covered some of the important aspects of forex trading methods and things you need to be aware of when you start your trading profession. By having all the information you will be able to take right decision in time and prevent possibilities of incurring losses.