An Introduction to Foreign Exchange Market Trading:
Foreign exchange market trading refers to a continuously modifying cash market where brokers involve in trading of currencies of different nations. This non-stop trading occurs across local and global markets.
The conditions in foreign exchange market trading are ever changing and the value of trader’s investment typically depend on these currency movements.
Terminologies related to Foreign Exchange Market Trading:
Investor’s Goal– An investor always looks for an opportunity to gain from foreign currency movements. However a gain from foreign exchange market trading can be termed as a reasonable only after comparing it with the return from alternative risk free investments such as long term U.S. government bonds.
On putting his money in the foreign exchange market trading must buy a currency only when its value can be expected to increase. However recent studies have shown that 70-90% of foreign exchange market trading is speculative about currency movements .
Exchange Rate– It is the price at which one currency is traded for the other. Most of the currencies are priced against US dollar. Cross rate is another concept which refers to the rate at which two uncommon currencies are exchanged. It is constructed by comparing the individual exchange rates of the two currencies against some major currency like the US dollar. The major currencies in the foreign exchange market trading are- US dollar, Euro, British pound sterling, Japanese yen etc.
Margin– The collateral paid by the investor to the banks while trading in the foreign exchange market trading is known as margin or minimum security in Forex markets. This collateral covers any currency trading loss.
Leveraged Financing- This basically concerns the use of credit. The loan in the margin is balanced by one’s initial deposit. Leveraged financing of US$ 1,000 can let one control up to US$1,00,000 in the foreign exchange market trading.
Instruments not involved in a major way in Foreign Exchange Market Trading:
The exchanges do not involve in trading of inter-bank currency contracts and options. Instead, banks and dealers are the main agents in the individual-based market for these non-standardized financial instruments. The trading of forward cash or spot trading in currencies also takes place in unregulated markets and price movements and speculative positions are liberalized to a great extent.