deVere Group Online Trading

What is Foreign Exchange?

Foreign exchange is the buying and the selling of foreign exchange in pairs of currencies. For example you may buy US dollars and sell Euros or you buy UK Pounds Sterling and sell Japanese Yen. Currencies are bought and sold because governments and companies need foreign exchange for their purchase of and payments for various commodities and services.

This type of trade is thought to constitute about 5% of all currency transactions, with the remaining 95% currency transactions being undertaken for speculation and trade. Companies will also buy and sell foreign currency in order to hedge against exchange rate risks, and to protect their financial investments. The exchange rates in foreign exchange markets also vary continuously and on daily basis, so need to be tracked to make optimal exchange decisions.

Approximately 85% of the trading is done in only US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. This is because they are the most liquid of foreign currencies (i.e. they can be easily bought and sold.) In fact the US Dollar is the most recognisable foreign currency even in countries like Afghanistan, Iraq and Vietnam. Other currencies may not be as liquid, possibly due to exchange controls or political instability, or may be prone to inflation.  Then there are others which are pegged to another major currency (usually the US Dollar) and which will therefore track exactly the fortunes of the currency they are pegged to.

The currency trading market is a true 24 hour market with trading being passed from East to West through the trading day. The market opens first in the financial centers of Sydney, moving to Tokyo, London and New York in that sequence through the day. Investors and speculators can then easily respond to the ever-changing situations and can buy and sell currencies simultaneously if they so wish. In fact many operate in two or more currency markets using arbitrage to gain profits (buying in one market and selling in another market or vice versa to take advantage of the prices and book profits).

There are again various factors which affect the currency markets, and whole areas of scientific analysis have been developed to study the effect of these, such as Technical Analysis and Fundamental Analysis. Both of these tools are used for analysing a variety of markets such as equity markets, stock markets, mutual funds markets etc.

Technical Analysis refers to reading, summarising and analysing data based on the data that is generated by the market. Fundamental Analysis refers to the factors which influence the overall market economy, and in turn how these affect the currency trading markets. Of course there are other economic and non economic factors which can suddenly affect the trading of the Forex markets such as the 9/11 tragedy, currency devaluations and larges trades placed by national banks, hedge funds etc. Currency markets can therefore be extremely volatile and unpredictable and can also move very fast. This, coupled with the fact that investors typically trade currencies on a highly leveraged basis means that currency trading has the potential for high returns but also for large losses.