Beginners Guide To Forex Trading
Forex, also known as Foreign Exchange, is the means by which a country trades its currency for another country’s currency for any number of reasons, some of which are international trade, commerce, tourism, among others. Countries may need to transact with other countries in their currencies due to the globalization of business.
In 1971, after the Brenton Woods accord, currencies were allowed to float freely against each other, and individually, the values of currencies have varied, which birthed the need for a medium of foreign exchange. Investment and commercial banks have taken up this service, on behalf of their clients, which has simultaneously provided a speculative environment using the internet for trading a currency against another currency.
Forex as a Hedge
Fixed rates at which transactions will be concluded, is a way the foreign exchange markets hedge the risk of fluctuations in currency values when they have to buy goods or services from or sell them to another country. This is accomplished by traders buying or selling currencies in the swap or forward markets, and the bank locks in a rate, so the trader knows what the exchange rate will be and reduce their company’s risk.
Forex as a Speculation
An opportunity exists to bet against changing values such as varying demand and supply factors like tourism, trade flows, interest rates, economic strength, etc., by buying or selling one currency against another in the hopes that buying it will eventually strengthen or the individual currency you sell will weaken against its counterparts.
Risk is somewhat averted by the introduction of Electronic Communication Network ( ECN) , which makes pricing transparent by bringing buyers and sellers into a centralized exchange. Retail traders, unlike traders with direct access to forex banks who are less exposed , also have the opportunity to avert risk by opening accounts at many major banks or larger more liquid banks.