The international Forex trading market has grown in volume and stature in the last few years. According to the Bank for International Settlements, the currency market generates an estimated daily turnover of over $3 trillion, with London generating the highest volume, followed by New York and Tokyo.
International Forex trading is mostly dominated by large banks and financial institutions. However, institutional investors have also started flocking into the currency market due to its relative security and high trading volumes. The foreign exchange market has been considered safer than other exchanges, particularly after the 2008 global credit crunch.
How to trade at the currency market
A trader can open an account at the foreign exchange market and simultaneously buy and sell a pair of currency. He or she can choose from a range of transaction types, which include spot, future, swap and forward. For an independent trader, the spot transaction is mostly the favored type.
A spot is a transaction that has a two-day delivery period. This involves a direct exchange between two currencies and requires cash rather than contracts. In terms of volume, spot transactions are the second largest segment of the FX market, second only to swaps.
Swaps, the largest transactions by volume in the foreign exchange market, are also the most common forward transaction methods. A currency swap involves two entities exchanging currencies for a specified period of time, with an agreement of reversing the deal at a later date. Swaps do not involve standardized contracts. In comparison, a currency future transaction has standard contracts and maturity dates. A futures contract usually covers an average period of three months.
Why you should open an account at FX
The FX market is considered relatively safe. Although profit margins are relatively low compared with other exchanges, their levels can be increased by increasing the volume of trades. Currencies traded in this market work against each other; hence, the strengthening of one will result in the weakening of another. It operates on a 24-hour period, except on weekends. This is beneficial to traders since it allows them to react quickly to global developments that may impact the status of the currency market. The foreign exchange market is also considered advantageous because of its high level of liquidity and its use of leverage.
International Forex trading continues to attract not only large financial institutions and big banks, but also commercial companies and small, individual investors. For those interested in entering the currency market, this might be as good a time as any.