As humans once traded primarily by barter and kept value in spices, herbs and other exchangeable materials, markets in different geopolitical zones were able to interact and stay connected to each other. Eventually, the new system of trade by currency took over and markets evolved to suit the modifications. Forex trading is a way by which different currencies are exchanged according to the value they hold. Forex is short for “Foreign Exchange” and is also known as FX trading. This market is very pertinent to global trade, as it sets exchange rates for different currencies.
Things to know about Forex trading
- The Forex market is a decentralized global market that involves the exchange of one currency to another for various reasons including trade, commerce, tourism, etc. If being measured by trading volume, it is the largest market in the world, trading at an average of around 5 trillion dollars every day
- The Forex market sets the cash value of each currency at relative and flexible rates to other currencies. This means these prices are constantly changing, with the market setting the price of a currency based on the amount of value it is in another currency
- Forex market is without a doubt the most liquid assets market globally. Currencies are easily sold and gotten and most times without losing any value
- It is worth noting that while Forex trading is a considerable player in global trade, it is also seen as a way to make profits. With a large daily trading volume, the prices of some currencies become arbitrary and volatile, increasing the possibility of high profits. This does not elude the attention of investors, who see it as a way to get a good profit on their money involved
The major players in the Forex market are large international financial institutions. It is divided into levels of access and there are Forex brokers that serve as the intermediary between the customers and the interbank system.
Like mentioned before, the Forex market is the largest market in terms of trading volume, and it operates on a 24 hour basis due to the difference in time zones that ensures the “eternal accessibility” of the market. This allows for easy and flexible movement to and from any of the major national currencies in the world within a little amount of time and for a small spread in most market conditions.
The market has its challenges though; the players in the industry, including brokers and dealers, allow for a high amount of leverage. What this means is that traders can control considerable points with just a little money involved in their part. Trader are therefore duly advised to understand the use and risks of leverage as excessive leverage can lead dealers into becoming insolvent, even when going through brokers such as South African Forex brokers.
The trading of currencies in productive and efficient ways, by very implication, requires some sort of understanding of basic economic and financial principles. Knowledge of geopolitical markets is a big help too, and it is advisable for currency traders to have a passing insight into the economies of various countries and how they interact.