The Stock Market
Foreign Exchange Market
The Foreign Exchange Market (also known as FX market) is an over-the-counter market where people can buy, sell, or speculate on foreign currencies. This market determines the exchange rate of different currencies around the world. Currencies usually trade in pairs, for example, euro-dollar. Because trade and the exchange of goods and services across the world, the foreign exchange market is considered one of the most liquid markets. Although theoretically there could be more combinations of currencies, 18 currency pairs dominate the transactions in the FX market. Because currency is exchanged all over the world at all times, the foreign exchange market is one of the most active ones and is open five and a half days of the week at all times. Sellers and buyers are connected directly to each other and currency markets represent the biggest over the counter markets. Currency as assets represents an opportunity to profit from changes in currencies and to profit from different interest rates set by each country’s central bank.
Pairs and Pips
As we mentioned previously, currencies are traded in pairs. In other words, to buy one currency you have to sell a different currency. Most currencies are priced at four decimals with the exception of the Japanese Yen, which is priced at two decimals. A “percentage in point” or pip is the smallest increment in trade, usually 1% or basis point, that you can make. How a currency pair moves determines whether you make a profit or not. For example, if you use dollars to buy euros and the euro becomes stronger against the dollar you make a profit.
The spot market is the current most popular market within the foreign exchange market and it deals with the exchanges of currencies. More broadly, the current price of the financial instrument is called the spot price and it is influenced by the current supply and demand, the political situation in the country, interest rate, and economic performance.
Futures & Forward Markets
The futures and forward markets trade contracts that represent a claim on the currency at a specific price at a specific point of time in the future. These contracts can offer some protection against risk in currency rates and international corporations often invest in them to hedge against future fluctuations of the currency rate.
Different investors have different reasons to be involved in the foreign exchange market:
Ways investors use foreign exchange markets
Choosing your personal strategy for foreign exchange trading
While it is difficult to evaluate the state of an entire country and predict its future, there are some indicators that can help you tell how a country is currently doing. The most popular ones include the Consumer Price Index (CPI), Purchasing Managers Index (PMI), the non-farm payrolls, retail sales, interest rates, inflation, durable goods, and monetary policy. There are also technical analysts that evaluate time trends who combine different studies to come up with their predictions. While developing an investment strategy takes time, gaining confidence, and becoming familiar with different resources is key. Our advice is to learn to trade with fake money one of the available platforms to evaluate your performance and recalibrate your strategy when needed.