Foreign Exchange Trading
Foreign exchange markets are the largest financial markets in the world. This market is also known as forex market, and it is the place where buying and selling of currency occurs. The price of a currency is dependent upon its exchange rate.
Forex Trading
Forex trading is dominated by the US dollar, British pound, Japanese yen and Euro. In 2001, an average of US$1,200 billion was traded every day on the foreign exchange markets.
Foreign exchange trading occurs 24 hours a day thanks to global co-operation. Forex traders in Asia pass their open currency positions to colleagues in Europe at the end of their business day. At the end of the European day, currency positions are passed to America. This is then finally given back to Asia.
Foreign Exchange Markets
Banks are the major participants in forex trading, earning profits by buying and selling currencies. Two-thirds of transactions in foreign exchange markets involve banks selling to each other. Central banks also often participate in the forex market to influence the value of their currency, using reserve currency to influence the exchange rate.
Brokers act as the middlemen between banks. They earn commission on the transactions they arrange. The broker tries to find them the best price for their currency, and their involvement allows anonymity to both the buyer and seller.
Bureaux De Change
About a third of bank transactions occur using brokers, but banks usually deal with each other directly. Bureaux de change are also a type of broker, and they accommodate both tourists and business people.
Forex Trader
Businesses and tourists also participate in the foreign exchange market to some extent, although tourists gain their foreign currency via banks or brokers such as bureaux de change. Businesses often use forex traders to access the forex market to trade with companies abroad, as usually trading is done either in the US dollar or the currency of the importer. They can also use the foreign exchange market to make investments. Large businesses often have their own trading desks for the forex market, staffed by their own forex trader or traders, if they frequently trade between countries.
Money can be made in forex trading by a forex trader trying to predict the way exchange rates will change. If the trader believes a currency will rise in price, he or she can buy it for the lower price and resell later for more money. Conversely, if they trader believes it will drop he or she can sell it at the higher price and buy it back at a lower price once the exchange rate has dropped.