Forex Invest for Success

Foreign Exchange Trading

Foreign exchange is the largest financial market in the world today. It happens when one currency is traded with another. Market participants include banks, commercial companies, central banks, investment management firms, hedge funds and retail forex brokers. The standard "lot" or the usual minimum trading size is 100,000 units of currency. Trading may be done using an electronic trading system or through brokers.

There are different levels of participation. The inter-bank market is considered as the inner most circle and information on prices is not available to those outside this circle. As the level of access widens, the difference between the bid and ask prices widens also due to the influence of volume. A trader can demand a better spread or smaller difference between the bid and ask price if the trader has large numbers of transactions for large amounts. The bid/ask spread is the difference between the bid and ask prices.

A spot transaction is a direct exchange between two currencies involving cash. A forward transaction is an agreement between a buyer and a seller on an exchange rate at a given future date. A foreign exchange option is a right for a pre-agreed exchange rate on a future date but is not an obligation to exchange one currency to another.

The top currency traders include the Deutsche Bank, UBS AG, Citi, Royal Bank of Scotland, Barclays Capital, Bank of America, HSBC, Goldman Sachs, JP Morgan, and Morgan Stanley among others.

Currency prices or exchange rates are determined by the supply and demand forces. This in turn is influenced by several factors such as economic factors, political factors and market psychology.

Economic factors include economic policies of a government, its budget and spending practices. How the central bank influences the supply and "cost" of money which is reflected in the prevailing interest rates. The competitiveness of a nation's economy as reflected in the surpluses and deficits of goods and services. Inflation rate lessens the purchasing power and the demand for such currency. In short, a robust economy increases the demand for its currency and thus a better performance in the foreign exchange market.

The political condition of a nation has an impact on its economy. This condition could have a positive or negative effect on the foreign exchange market. Political instability for instance could turn off investors and thus disrupt the economy. This could then translate to a slow performance of their currency in the foreign exchange market.

Another big factor in the foreign exchange market is the psychology of the market. A good performance of a currency would trigger more trading activity for that currency. A greater demand for such currency could push the value of such currency higher. Numbers to watch out for include employment, inflation, money supply and trade balance.