- Foreign Exchange — Definition, Trading Factors, Forex Markets
- Factors that Affect Foreign Exchange Rates
- The Foreign Exchange Market
- Related Readings
- The foreign exchange market
- The supply of currency
- Exchange rates
- An increase in the exchange rate
- Recent sterling rates
- Forex Market or Foreign Exchange Market
- Short History of the Foreign Exchange Market
- Foreign Exchange Market Characteristics
- Over-the-Counter vs. Exchange-Traded Segment
- Various Parties involved in Foreign Exchange Market
- Payment and Settlement Systems
- What is a Foreign Exchange Market? Definition, Participants, Characteristics, Transactions, Functions, Advantages, Disadvantages
- Participants in the Foreign Exchange Market
- Characteristics of the Foreign Exchange Market
- Transactions in Foreign Exchange Market
- Spot Market Transactions
- Futures Market Transactions
- Forward Market Transactions
- Functions of Foreign Exchange Market
- Advantages of Foreign Exchange Market
- Disadvantages of Foreign Exchange Market
- What is Forex? Introduction to the Foreign Exchange Market
- Forex Market Characteristics
- High volatility
- 24-hours activity
- High liquidity
- Transaction swiftness
- Forex market players
- Classification of Forex instruments
- Major currency pairs
- Cross rates
- Cross rates of currencies with high potential
- Stocks of large companies
Foreign Exchange — Definition, Trading Factors, Forex Markets
Foreign exchange (Forex or FX) is the conversion of one currency into another at a specific rate known as the foreign exchange rate.
The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of supply and demandSupply and DemandThe laws of supply and demand are microeconomic concepts that state that in efficient markets, the quantity supplied of a good and quantity demanded of that good are equal to each other. The price of that good is also determined by the point at which supply and demand are equal to each other..
The most traded currencies in the world are the United States dollar, Euro, Japanese yen, British pound, and Australian dollar. The US dollar remains the key currency, accounting for more than 87% of total daily value traded.
Factors that Affect Foreign Exchange Rates
Many factors can potentially influence the market forces behind foreign exchange rates. The factors include various economic, political, and even psychological conditions.
The economic factors include a government’s economic policies, trade balances, inflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set period of time.
The rise in the price level signifies that the currency in a given economy loses purchasing power (i.e., less can be bought with the same amount of money)., and economic growth outlook.
Political conditions also exert a significant impact on the forex rate, as events such as political instability and political conflicts may negatively affect the strength of a currency. The psychology of forex market participants can also influence exchange rates.
The Foreign Exchange Market
The foreign exchange market is a decentralized and over-the-counter market where all currency exchange trades occur. It is the largest (in terms of trading volume) and the most liquid market in the world. On average, the daily volume of transactions on the forex market totals $5.1 trillion, according to the Bank of International Settlements’ Triennial Central Bank Survey (2016).
The forex market major trading centers are located in major financial hubs around the world, including New York, London, Frankfurt, Tokyo, Hong Kong, and Sydney.
Due to this reason, foreign exchange transactions are executed 24 hours, five days a week (except weekends).
Despite the decentralized nature of forex markets, the exchange rates offered in the market are the same among its participants, as arbitrage opportunities can arise otherwise.
The foreign exchange market is probably one of the most accessible financial markets.
Market participants range from tourists and amateur traders to large financial institutions (including central banks) and multinational corporationsMultinational Corporation (MNC)A multinational corporation is a company that operates in its home country, as well as in other countries around the world. It maintains a.
Also, the forex market does not only involve a simple conversion of one currency into another.
Many large transactions in the market involve the application of a wide variety of financial instruments, including forwards, swaps, optionsOptions: Calls and PutsAn option is a form of derivative contract which gives the holder the right, but not the obligation, to buy or sell an asset by a certain date (expiration date) at a specified price (strike price). There are two types of options: calls and puts. US options can be exercised at any time, etc.
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- EUR/USD Currency CrossEUR/USD Currency CrossThe Euro to Dollar exchange rate (EUR/USD or €/$ for short) is the number of U.S. dollars for every 1 Euro. It is the convention for quoting the exchange rate between the two currencies. This guide will provide an overview of the factors that impact the FX rate, and what investors and speculators need to know
- Foreign Exchange Gain/LossForeign Exchange Gain/LossA foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign currency, and that currency fluctuates
- International Fisher EffectInternational Fisher Effect (IFE)The International Fisher Effect (IFE) states that the difference between the nominal interest rates in two countries is directly proportional to the changes in the exchange rate of their currencies at any given time. Irving Fisher, a U.S. economist, developed the theory.
- USD/CAD Currency CrossUSD/CAD Currency CrossThe USD/CAD currency pair represents the quoted rate for exchanging US to CAD, or, how many Canadian dollars one receives per US dollar. For example, a USD/CAD rate of 1.25 means 1 US dollar is equivalent to 1.25 Canadian dollars. The USD/CAD exchange rate is affected by economic and political forces on both
The foreign exchange market
Currencies are bought and sold, just other commodities, in markets called foreign exchange markets. The world’s three most common transactions are exchanges between the dollar and the euro (30%) the dollar and the yen (20%) and the dollar and the pound Sterling (12%).
How currency values are established depends upon whether they are determined solely in free markets, called freely floating, or determined by agreements between governments, called fixed or pegged. most currencies, the pound has at times been both fixed, and floating.
Between 1944 and 1971, most of the world’s currencies were fixed to the US Dollar, which in turn was fixed to gold. After a period of floating, the pound joined the European Exchange Rate Mechanism (ERM) in 1990, but quickly left in 1992, and has floated freely ever since.
This has meant that its value is largely determined by the interaction of demand and supply.
The demand for currencies is derived from the demand for a country’s exports, and from speculators looking to make a profit on changes in currency values.
The supply of currency
The supply of a currency is determined by the domestic demand for imports from abroad. For example, when the UK imports cars from Japan it must pay in yen (¥), and to buy yen it must sell (supply) pounds.
The more it imports the greater the supply of pounds onto the foreign exchange market. A large proportion of short-term trade in currencies is by dealers who work for financial institutions.
The London foreign exchange market is the World’s single largest international exchange market.
The equilibrium exchange rate is the rate which equates demand and supply for a particular currency against another currency.
If we assume the UK and France both produce goods that the other wants, they will wish to trade with each other. However, French producers require payment in Euros and the British producers require payments in pounds Sterling.
Both need payment in their own local currency so that they can pay their own production costs in their local currency.
The foreign exchange market enables both French and British producers to exchange currencies so that trades can take place.
The market will create an equilibrium exchange rate for each currency, which will exist where demand and supply of currencies equates.
Changes in the value of a currency Sterling reflect changes in demand and supply. On a demand and supply graph, the price of Sterling is expressed in terms of the other currency, such as the $US.
An increase in the exchange rate
For example, an increase in exports would shift the demand curve for Sterling to the right and push up the exchange rate. Originally, one pound bought $1.50, but now buys $1.60, hence its value has risen.
Changes in a country’s interest rates also affect its currency, through its impact on the demand and supply of financial assets in the UK and abroad. For example, higher interest rates relative to other countries, makes the UK attractive the investors, and leads to an increase in the demand for the UK’s financial assets, and an increase in the demand for Sterling.
Conversely, lower interest rates in one country relative to other countries leads to an increase in supply, as speculators sell a currency in order to buy currencies associated with rising interest rates. These speculative flows are called hot money, and have an important short-term effect on exchange rates.
Recent sterling rates
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Forex Market or Foreign Exchange Market
Foreign exchange refers to money denominated in the currency of another nation or group of nations. Foreign exchange can be cash, bank deposits or other short-term claims.
But in the foreign exchange market as the network of major foreign exchange dealers engaged in high-volume trading, foreign exchange almost always take the form of an exchange of bank deposits of different national currency denominations.
A Foreign exchange market or Forex market is a market in which currencies are bought and sold. It is to be distinguished from a financial market where currencies are borrowed and lent.
Short History of the Foreign Exchange Market
Foreign exchange markets mainly established to make easy cross border trade in which there is involvement of different currencies by governments, companies and individual investors. More ever these markets generally existed to supply for the international movement of capital and money, even the initial markets had speculators.
Today, a great part of Foreign Exchange market working is being determined by assumption, arbitrage and professional dealing, in which currencies are traded any other commodity. The Retail Investors only means of gaining contact to the foreign exchange market was through banks that transacted in a huge amount of currencies for commercial and speculation purposes.
After exchange rates were allowed to float freely in 1971, the volume of trade has been increased over the time. Most of the world’s major currencies were pegged to the US dollar due to an agreement that is called the Bretton Woods Agreement. The participating countries try to maintain the value of their currencies against US Dollar also with the rate of the gold.
These countries are bounded to devalue their currencies for the purpose of gaining advantage.
Foreign Exchange Market Characteristics
The foreign exchange market place is a twenty-four hour market with exchange rates and market conditions changing constantly. However, foreign exchange activity does not flow evenly.
Over the course of a day, there is a cycle characterized by periods of very heavy activity and other periods or relatively light activity. Business is most heavy when two or more market places are active at the same time such as Asia and Europe or Europe and America.
Give this uneven flow of business around the clock, market participants often will respond less aggressively to an exchange rate development that occurs at a relative inactive time of day, and will wait to see whether the development is confirmed when the major markets open.
Nonetheless, the twenty-four hour market does provide a continuous “real-time” market assessment of the currencies’ values.
The market consists of a limited number of major dealer institutions that are particularly active in foreign exchange, trading with customers and (more often) with each other.
Most, but not all, are commercial banks and investment banks. The institutions are linked each other through telephones, computers and other electronic means.
There are estimated 2,000 dealer institutions in the world, making up the global exchange market.
Each nation’s market has its own infrastructure. For foreign exchange market operations as well as for other matters, each country enforces its own laws, banking regulations, accounting rules, and tax codes.
They also have different national financial systems and infrastructures through which transactions are executed and within the currencies are held.
With access to all of the foreign exchange markets generally open to participants from all countries, and with its vast amounts of market information transmitted simultaneously and almost instantly to dealers throughout the world, there is an enormous amount of cross-border foreign exchange trading amongst dealers as well as between dealers and their customers. At any moment, the exchange rates of major currencies tend to be virtually identical in all of the financial centers. Rarely are there such substantial price differences among these centers as to provide major opportunities for arbitrage.
Over-the-Counter vs. Exchange-Traded Segment
There are generally two different market segments within the foreign exchange market: “over-the-counter” (OTC) and “exchange-trade”.
In the OTC market, banks indifferent locations make deals via telephone or computer systems. The market is largely unregulated. Thus, a bank in a country such the USA does not need any special authority to trade or deal in foreign exchange.
Transactions can be carried out on whatever terms and with whatever provisions are permitted by law and acceptable to the two counter-parties, subject to the standard commercial law governing business transactions in the respective countries.
However, there are “best practice recommendations” such from the Federal Reserve Bank of New York with respects to trading activities, relationships, and other matters.
Trading practices on the organized exchanges and the regulatory arrangements covering the exchanges, are markedly different from those in the OTC market. In the exchange, trading takes place publicly in a centralized location and products are standardized. There are margin payments, daily marking to market, and a cash settlement through a central clearinghouse.
With respects to regulations in the USA, exchanges at which currency futures are traded are under the jurisdiction of the Commodity Futures Trading Corporation (CFTC).
Steps are being taken internationally to harmonize trade regulations and to improve the risk management practices of dealers in the foreign exchange market and to encourage greater transparency and disclosure.
Various Parties involved in Foreign Exchange Market
Today, commercial banks and investment banks serve as the major dealers by executing transactions and providing foreign exchange services. Some, but not all, are market makers, that regularly quote both bids and offers for one ore more particular currencies thus standing ready to make a two-sided market for its customers.
Dealers also trade foreign exchange as part of the bank’s proprietary trading activities, where the firm’s own capital is put at risk on various strategies.
A proprietary trader is looking for a larger profit margin a directional view about a currency, volatility, an interest rate that is about to change, a trend or a major policy move. .
Payment and Settlement Systems
Executing a foreign exchange transaction requires two transfers of money value, in opposite directions, since it involves the exchange of one national currency for another.
Execution of the transaction engages the payment and settlement systems of both nations.
“Payment” is the transmission of an instruction to transfer value that results from a transaction in the economy, and “settlement” is the final and unconditional transfer of the value specified in a payment instruction.
What is a Foreign Exchange Market? Definition, Participants, Characteristics, Transactions, Functions, Advantages, Disadvantages
Definition: The foreign exchange market or the ‘forex market’, is a system which establishes an international network allowing the buyers and sellers to carry out trade or exchange of currencies of different countries. A forex market can be stated as one of the most liquid financial markets which facilitate ‘over-the-counter’ exchange of currencies.
In New York, advanced telecommunication technology called Society for Worldwide Interbank Financial Telecommunications (SWIFT) is used by the banks for carrying out foreign exchange transactions at the electronic clearinghouses Clearing House Interbank Payment System (CHIPS).
Participants in the Foreign Exchange Market
The participants here refers to the people involved in the exchange or trade of foreign currency. These can be the buyers, sellers or the intermediaries.
The participants in a forex market include the following five parties:
- Central Bank: The central bank regulates the exchange rates of the currency of their respective country to ensure fluctuations within the desired limit and keep control over the money supply in the market.
- Commercial Banks: The commercial banks are the medium of forex transactions, facilitating international trade and exchange to its customers along with other forex functions making foreign investments.
- Traditional Users: The traditional users involve foreign tourists, companies carrying out business operations across the globe, patients taking treatment in other country’s hospitals and students studying abroad.
- Traders and Speculators: The traders and speculators are the opportunity seekers and look forward to making a profit through trading on short-term market trends.
- Brokers: They are considered to be financial experts who act as an intermediary between the dealers and the investors by providing the best quotations.
Characteristics of the Foreign Exchange Market
To understand what a forex market is, we must first go through its essential features.
Discussed below are the various characteristics of the foreign exchange market which differentiates it from other financial markets:
- Market Transparency: It is effortless to monitor the fluctuations in the value of currencies of different countries in a forex market easily through account tracking and real-time portfolio, without the involvement of brokers.
- Dollar is Extensively Traded Currency: The USD, which is paired with almost every country’s currency and listed on the forex, is the most widely traded currency in the world.
- Most Dynamic Market: The value of the currencies in the forex market keeps on changing every second and function twenty-four hours a day. This makes it one of the most active markets in the world.
- International Network of Dealers: The foreign exchange market establishes a medium among the dealers and also with the customers. There are dealer’s institutions located globally to carry out the exchange and trading activities.
- “Over-The-Counter” Market: In different countries, the forex market is the highly unregulated market initiating over the counter trade by the banks through telex and telephone.
- High Liquidity: The currency is considered to be the most widely traded financial instrument across the globe, making the forex market highly liquid.
- Twenty-Four Hour Market: The foreign exchange market is operational for twenty-four hours of the day, initiating the active trade and exchange of currencies at any time.
Transactions in Foreign Exchange Market
A forex market performs three significant operations which are explained in detail below:
Spot Market Transactions
The forex transactions which are executed immediately, or usually within two days, is known as the spot transaction. Such a forex market is termed as a spot market, and the rate of exchange is called a spot rate.
Futures Market Transactions
The market in which the exchange of currencies involve a future delivery and payment and the rate of exchange for the same is pre-determined is called a futures forex market. Such exchange rate is known as a future rate. It protects the buyer from the risk of a rise in the value of the currency.
Forward Market Transactions
A forward forex market is however very similar to the futures market, but here, the terms of the contract are negotiable and can be amended by any of the parties involved.
- Options: In an options contract, the holder is not bound to but have the right to buy or sell the specified asset quantity at the pre-determined price on the specific future.
- Futures: In a future contract, the quantity of an asset, date of execution and price of the contract is fixed and standardized.
- Swap: Usually, commercial banks adopt swap contracts if they perform forward exchange business operations. Here, they sell off a particular currency in the spot market to buy that same currency in the forward market.
- Arbitrage: The rigorous buying and selling of different currencies in the forex market to fetch gains such transactions are called arbitrage.
Functions of Foreign Exchange Market
A foreign exchange market is the largest global financial market which performs some crucial functions. The three of the primary functions of a forex market are as follows:
- Hedging Function: The globally trading business entities can hedge the risk of currency fluctuations by adopting means a letter of credit or forward contract. Here, the goods are to be delivered on a pre-determined future date and at a mutually agreed price.
- Transfer Function: The forex market majorly functions to exchange the currency of one country into that of other, to facilitate international trade activities.
- Credit Function: Providing the credit facility at the time of making overseas payments through foreign bill of exchange to its maturity or execution, is another significant function of the forex market.
Advantages of Foreign Exchange Market
As we know that ‘trade makes everyone better-off’ and so goes for the exchange or trade of currencies.
Let us now discuss the various benefits of the foreign exchange market:
High Leverage: A forex investor can avail the facility of leverage or loan of up to 20 or 30 times of his/her capacity, for trading in the forex market.
International Trade: Every country has its currency and therefore, to facilitate trade activities between two countries, the forex market is essential.
Trading Option: For the speculators or traders, foreign exchange market is just other financial markets where they can make money on short term fluctuations in the currencies.
Flexibility: We know that the forex market is a twenty-four-seven market, and there is no minimum or maximum limit of the exchange amount. It provides the flexibility of investment or exchange to the traders.
Hedging Risk: The forex market provides for hedging the risk of loss on currency fluctuations while carrying global business operations and trading in foreign currency.
Low Transaction Costs: Since brokers are not very much entertained in the forex market, the transaction cost (called as ‘spread’) charged by the dealers is reasonably low if compared to other financial markets.
Inflation Control: To maintain the economic stability in the country and control situations inflation, the central bank maintains a forex reserve which consists of currencies of different countries around the world.
It adopts other means too, decreasing bank lending rates and selling out domestic currency for foreign currency.
Disadvantages of Foreign Exchange Market
A forex market is not always favourable and involves various kinds of risks. These can be seen as its drawbacks and are elaborated below:
- Leverage Risks: Leverage refers to loan in other terms. Forex market initiates the leverage of up to 20 to 30 times the investment capacity of the traders or speculators, which may even lead the loss of the entire amount of the investor.
- Counterparty Risks: The forex is highly unregulated with no central authority for currency exchange or trading risk mitigation. Thus, it may encounter the risk of non-fulfilment of the obligations by any of the parties involved in such a contract.
- Operational Risks: Since forex is a twenty-four hours market, it is difficult to manage its operations by humans. As a result, the traders and MNCs rely on the algorithms, and trading desks spread, respectively, to safeguard their investment in their absence.
The countries which actively participate in the forex trading includes US, UK, Australia, Germany, Switzerland, France, Italy, Japan, Indonesia, Cyprus, Malta, Bulgaria, Romania and many Central and Eastern Europe countries.
In countries China, South Africa, Nigeria, Russia, Egypt and Ukraine, forex trading is allowed but under the restrictions of the central government.
However, in India, Bosnia Herzegovina, Israel, Belgium, Malaysia, North Korea, France and Pakistan, forex trading is strictly prohibited.
What is Forex? Introduction to the Foreign Exchange Market
Forex exchange market (name derived from FOReign EXchange) is an international market meant for broker companies, banks and investment funds trading currencies.
Currency exchange market formed in the 70-s when the financial world passed from the gold standard to free currency pricing. The market works on the basis of free conversion of currencies without state interference and guarantees freedom of such transactions.
At the same time, there is a number of rules and restrictions regulating relationship between traders and brokers.
Sometimes one might hear Forex called monetary exchange; however, this is wrong. Forex is an international non-stock exchange without a particular place for trading. One can trade via the Internet or using a telephone. Market players can make currency transaction from any spot on the globe. So long that Forex is a non-stock exchange, transactions may go without registration.
Though Forex players do not have to worry about the place of trading, their work still depends greatly on trading hours which vary in different parts of the world: in Asia-Pacific, in Europe and in North America.
Starting 1989 Bank for International Settlements (BIS) carries out a thorough analysis of the market every 3 years. Data shows that the daily turnover of Forex was 1.5 trillion USD in the year 2000 and reached 4.0 trillion USD 10 years later. BIS experts forecast the growth of Forex daily turnover up to 10 trillion USD by 2020.
Part of this volume is provided by margin trading which implies contracting for sums substantially bigger than the actual capital of one transactor. Regardless of nature and the purposes of transactions, a large daily turnover guarantees high liquidity of the market.
Another fact is that roughly 75% of transactions on Forex are conducted by American banks.
Forex Market Characteristics
The international exchange market Forex is of one of the most numerous types of financial markets existing at present. At the same time it is one of the largest markets.
As other markets do, it attracts traders and investors offering them an opportunity to make a profit on the difference in exchange rates or just to exchange one currency for another.
Every person making an exchange operation via a mobile bank application automatically becomes part of the scheme which connects the participants through various information systems and gives them access to currency exchange operations Monday to Friday 24 hours a day.
Forex has a number of advantages distinguishing it from other market types.
To become a Forex player and get an opportunity to make a profit on the difference in exchange rates, one has to open a trading account in a company providing such services.
Then one has just to replenish their account and start trading. It is worth remembering that successful trading requires some experience and certain knowledge of chart analysis.
However, almost any person can integrate rather easily into trader community.
When buying or selling currencies a trader does not need to have a deposit covering the price of the whole contract. A leverage will help enhance one’s financial potential, because it allows for transaction amounting to much bigger sums than the trader possesses.
On the one hand, this is an opportunity to earn a substantial profit with a modest sum on the account; on the other hand, risks grow accordingly. Thus, the risks are to be thoroughly studied and controlled.
More information you can find in our posts What is Leverage and How to Trade with Leverage.
Volatility means any changes in the price of an instrument. Forex is a market of high volatility. Exchange rates are particularly quick to change, and a trader’s aim is to make a profit on their volatility.
That is why the bigger the changes are, the bigger is the trader’s profit, regardless of whether a currency is growing or falling in price, the latter phenomenon being yet another characteristic of the market. The truth is that traders can equally make a profit rises and falls of currencies.
That is why high volatility together with leverage provides an excellent opportunity for earning money. However, risks are to be taken into account.
As mentioned above, Forex functions Monday through Friday 24 hours a day. There are always sellers and buyers on the market. One may use aggressive American sessions with crazy volatility as well as quiet Asian sessions with minimal changes of rates.
Market analysis can be performed in the morning as well as in the evening; positions can be opened any time in order to make a profit on currency volatility.
This is a great advantage compared to stock market which allows trading only during their trading sessions.
Market players can get full information about the market from any source. Important news influencing exchange rates are announced at dates and times known in advance. The market reacts, and traders answer to its movements.
In other words, before the announcement of certain news (for example, unemployment rates) no one can tell what follows and how the market will react upon an expected event; before something happens everyone operates the same amount of data.
The goods of an exchange market is money. It is considered to be goods of high liquidity which means one can easily exchange one currency for another at any moment.
Low liquidity is typical of, say, real estate: an apartment can be sold quickly only if the seller requires a price substantially lower than the market price.
In our case a trader can always open a position on Forex at current rates and easily close it, because the exchange market is so vast one can find a buyer or a seller at any moment.
For opening a position and buying or selling necessary currency, it is enough to press the key “Order” at the terminal. In case one wants to close a position (for example, to lock in profits), it is enough to press the key “Close order”. It only takes a split second.
Thus, Forex is rather different from other markets. It allows for a quick access to trading and work from any spot on the globe at any time convenient.
Using a leverage trader can make a transaction for a sum significantly bigger than the sum on their account. Exchange rates are changing constantly which provides another opportunity for making a profit. High liquidity allows for fast opening and closing of positions virtually at any moment.
Forex market players
International inter-bank market Forex is a non-stock trading platform. In other words, the platform does not exist physically. All operations take place on the Net. Presently, major Forex players are national Central banks of different countries.
Most influential ones are the European Central Bank and the Federal Reserve System. Central banks of other countries also influence the volatility of currencies, their aim being prevention of steep surges in prices.
Commercial banks are also present on Forex. They can hardly influence monetary and credit policy of major players; however, they significantly enhance the liquidity on the market.
Commercial banks make speculative influence, constantly manipulating exchange rates in order to make a profit and making lots of transactions.
Commercial banks make profit spread which is the difference between buying and selling rates.
Apart from banks, other Forex players are brokers, broker companies and dealing services which contribute a lot to currency price formation as agents.
What is more, they give access to the inter-bank market to individual traders and investors; trading via broker and dealing companies, individuals make the largest part of transactions on the market.
Yet another group of Forex players is comprised of funds: insurance, pensions and hedge funds. They make the largest, sometimes rather aggressive transactions on the market. Their goal is nothing else but to make a profit the difference in exchange rates.
The next group of market players consists of importer and exporter companies; as a rule, they have no direct access to the market, making transactions through commercial banks. They do not aim at speculating on Forex, rather, they buy and sell currencies required for their main business.
Classification of Forex instruments
By trading instruments we normally mean financial assets one can trade in order to make a profit.
Forex features a great variety of trading instruments, including major currency pairs, cross rates and cryptocurrencies. They are arranged in a number of groups.
Major currency pairs
The first one consists of major currency pairs, such as EUR/USD, GBP/USD and the . Among such instruments, most currencies are traded against the US dollar, which virtually guarantees excellent liquidity and volatility of any pair.
According to certain data, transactions including USD comprise some 85% of all operations on the market, every step of a great amount of traders giving more dynamics to the price.
Major currency pairs have become so popular among players because they help figure out the dynamics of prices and make a profit it.
The second group of instruments consists of cross rates, such as EUR/JPY, GBP/JPY, EUR/GBP, EUR/CHF etc. These assets facilitate trading currencies of the 7 leading countries of the world avoiding USD.
Such instruments have been created in order to provide for direct payments between the countries and enhance their relations.
Pairs from this group also show good volatility and liquidity as well as acceptable spreads and attract a lot of traders.
Cross rates of currencies with high potential
Cross rates of currencies of countries yet having potential for further development comprise a separate group of instruments, example being CAD/JPY (the Canadian dollar to the Japanese yen). Any pair in the group has particularities that let traders make a stable profit.
The fourth group consists of precious metals. The most popular ones traded via USD are gold and silver. Precious metals are most popular among major market players that practically hedge their risks in order to avoid losses. In crises these instruments receive particular attention. They are called “save havens”, and the prices for them normally grow in turbulent times.
Stocks of large companies
The fifth group features a vast variety of stocks of large world companies. Buying a basic asset, a trader does not become its owner, rather, they make an agreement to acquire the difference in the price.
Such type of trading is available with CFD instruments. Un investors, traders can make a profit the growth of the price of their assets as well as the fall.
Public assets of large companies are normally “transparent”, changes in their price are easy to forecast, thus they are highly popular among traders.
The sixth group consists of commodities, gas and oil being the most popular instruments. The influence of hydrocarbons on the world’s economy steadily growing, the interest toward these instruments is more than understandable.
The seventh group is comprised of futures. Futures strongly depend on the contracts between pairs, this being most obvious in primary producing countries where supply and demand are determined by seasonal changes and the current state of the market.
The eighth group features cryptocurrencies. The most characteristic of them – Bitcoin – has lately become incredibly popular. Its speedy growth encouraged traders to buy, while its precipitant fall made them sell with equal enthusiasm.
The ninth group consists of options. In the last few years it has become rather popular to buy an asset (actually the right for it rather than the asset physically) at a certain price for a certain period of time (specified in the contract). These days binary options are of special popularity as they let the trader know the gain as well as the loss in advance.
Naturally, a trader has to pick up an instrument sooner or later. This is an important step virtually defining the trader’s future on the market. What is more, it is worth keeping in mind that force majeure circumstances such as natural disasters, political instability or major financial and economical crises are possible at any time.
Their consequences would be serious long-time fluctuations of most assets. To work effectively in such circumstances one has to have substantial knowledge and experience in trading. Studying fundamental approach and technical analysis will do only good. But the key point in long-time successful and stable trading is to improve one’s skills and knowledge constantly.
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