The currency markets are the most liquid and widely traded capital market around the globe. There is a need to trade currencies, as countries that trade with one another need to exchange currencies nearly every minute of every day. When you travel to another country, you need to exchange your home currency for the currency where you are traveling, to purchase goods or services. The future movements of a currency pair are based on several factors which include the demand for a country’s currency as well as, the standard noise that capital markets experience. Before you get started with currency trading, you should know about some of the nuances of the practice.
What is Traded in the Forex Markets
The securities that are used in the foreign exchange markets, which can be viewed on the iFOREX currency trading platform are currency pairs. A pair is the exchange rate where you can receive one currency and pay away another currency. The most commonly traded exchange rate is the spot rate, which requires that you receive and deliver the physical currency that you trade within 2-business days. If you plan on holding on to your currency trade for more than 2-days, you will need to enter the forward forex market. There are also a few currencies where the exchange is done the next day. This is the case for the USD/CAD which has a tom-next settlement.
The Bid and Offer
When you purchase a currency pair you are buying one currency and simultaneously selling another currency. Each currency pair is quoted differently based on specific criteria. The bid is where market participants are willing to purchase a currency pair, and the offer is where market participants are willing to sell a currency pair. For example, if the EUR/USD is 1.3050/55, the bid is 1.3050 and the offer is 1.3055. When you purchase a currency pair you can do this where others are willing to sell the currency pair which is the offer or the right side of the bid/offer, the reverse is true if you want to immediately sell a current pair. There is also nothing wrong with joining the bid or the offer and waiting for the market to come to you. Generally reputable brokers will provide tight bid/offer spreads.
Who are the Players
The largest players in the forex market are market makers, which are banks and investment banks. These players can interact directly with central banks to purchase and sell currency. They also interact with one another throughout the day. The next group of players are funds, including hedge funds, private wealth funds, and sovereign wealth funds, as well as commercials. These players take huge positions in the currency market. At times they will speculate and at other times they will hedge liabilities. For example, if you are owed 100 million Euros from a sale of building, you might consider hedging your currency risk.
Prior to trading the forex markets, you should spend some time evaluating a platform to see if you understand how to trade and the process of trading.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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