You may have noticed that the value of currencies goes up and down every day. What most people don’t realize is that there is a foreign exchange market (or ‘Forex’), where you can potentially profit from the movement of these currencies. The best known example is George Soros who made a billion dollars in a day by trading currencies. Be aware, however, that currency trading involves significant risk and individuals can lose a substantial part of their investment. As technologies have improved, the Forex market has become more accessible resulting in an unprecedented growth in online trading. One of the great things about trading currencies now is that you no longer have to be a big money holder to trade this market; traders and investors like you and us can trade on Forex and profit on a daily basis.
The Forex market is the largest financial market in the world. Its average daily trading volume is more than $5 trillion. Compare that with the New York Stock Exchange, which only has an average daily trading volume of $155 billion. In fact, if you put ALL of the world’s equity and futures markets together, their combined trading volume would only equal a QUARTER of the Forex market. Why is size important? Because there are so many buyers and sellers that transaction prices are kept low.
How is Forex traded?
The mechanics of a trade are virtually identical to those in other markets. The only difference is that you're buying one currency and selling another at the same time. That's why currencies are quoted in pairs, like EUR/USD or USD/JPY. The exchange rate represents the purchase price between the two currencies.
The EUR/USD rate represents the number of USD one EUR can buy. If you think the Euro will increase in value against the US Dollar, you buy Euros with US Dollars. If the exchange rate rises, you sell the Euros back, and you cash in your profit.
Who Trades Forex?
There are essentially two types of traders in the foreign exchange market: hedgers and speculators. Hedgers are always looking to avoid extreme movements in the exchange rate.
Speculators, on the other hand, are risk seeking and always looking for volatility in exchange rates to take advantage of. These include large trading desks at the big banks and retail traders.
What Moves Forex Market?
In reality, the above example is only one of many factors that can move the FX market. Others include broad macro-economic events like the election of a new president, or country specific factors such as the prevailing interest rate, GDP, unemployment, inflation and the debt to GDP ratio, to name a few. Top traders use economic calendar to stay up to date with these and other important economic releases that can move the market.