Forex Capital Markets

The Foreign Exchange market, also known as the “Forex” market, is the largest financial market on earth, boasting a daily average turnover of roughly $2.1 trillion (US). The term ‘Foreign Exchange’ simply refers to the simultaneous buying of one currency and selling of another. Financial currencies are measured on a floating exchange rate and are typically traded in pairs, such as Euro/Yen or Dollar/Euro. Foreign Exchange trading is not centralized on any one exchange like the stock and futures markets. Instead, the Forex market is considered an Over the Counter (OTC) or ‘Interbank’ market, since transactions are carried out between two parties using the telephone or an electronic network.

Unlike any other financial market, Forex investors can react to currency fluctuations caused by economic, social and political events in real time. Forex is truly a 24-hour financial marketplace. Forex trading starts every day in Sydney, and circles the globe as the business day begins in various financial centers, such as Tokyo, London, and New York. Day or night, the Forex market is open and somewhere in the world, trades are taking place.

How are currency prices determined?

Currency prices are affected by a range of factors. These include inflation and political stability, economic and political conditions, and interest rates. Governments sometimes participate in the Forex market. This is referred to as Central Bank intervention and takes place when a government attempts to manipulate the value of their currency, either by saturating the market with their domestic currency in an effort to lower the price, or on the contrary buying in order to raise the price. In addition to the previously mentioned factors, large market orders can also cause volatility in currency prices. The Forex market is so large that one force or factor cannot influence the market substantially for a sustained period of time.

Is Forex trading risky?

All trading involves some amount of risk. In fact, risk is what enables traders to make a profit in the marketplace. Trading can be extremely risky if you do not have experience and knowledge. Another factor that influences whether any one individual perceives the market as risky is the amount of cash on hand to trade with. To some extent, the volatility depends on how leveraged your positions are. (For more specific information on leveraged positions please refer to our other articles.) Other Forex traders around the world are looking for the same potential rewards from their trades that you are. These traders include other individual Forex traders, banks, and institutional traders.

Some traits you will need in order to mitigate the risk involved in trading are money management skills, talent, discipline, and the ability to trade without becoming emotional. Bear in mind, Forex trading is speculative and any money used should be money you can afford to lose without negatively impacting your quality of life.

How is Forex trading different from stock trading or investing in traditional securities?

Compared to many other investments, Forex trading is a very short-term investment strategy. Transactions may last from a few minutes to a few days. Sometimes trades last a few weeks. This is very different from the strategy of ‘buy-and-hold’ or investing for growth. The goal with Forex is to increase profits in your Forex brokerage account on a daily or weekly basis. When compared to continuing growth investments such as stocks, mutual funds, bonds, or long-term notes it seems Forex traders hop in and out of the market. This is true to some extent, however, there is a rationale behind this strategy and Forex traders typically monitor their positions constantly in order to exit trades at the most profitable juncture.

How can I learn more and trade successfully?

As with anything else, learn as much as you can. Start to set aside funds specifically for trading that you will keep separate from other investments, or money needed to pay for living expenses.

Most experts agree that beginning traders, should trade on a demo account until they have shown profit for at least two consecutive months. This increases the probability that novices have an idea of what they are doing prior to trading real money. A demo account is exactly the same as a real trading account except it is not funded with real money. Demo accounts are traded with “play” money, similar to online poker websites which allow you to practice and sharpen your skills without risking real cash. The demo account operates under real market conditions. Although you may be excited to get started trading, trading a demo account is a critical component of the learning process.

Contact Lucrox Foreign Exchange at www.lucrorfx.com for more information on forex capital markets today!

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