Foreign Exchange (Forex) trading is undertaken by a range of investors; from professional currency traders and businesses, to individuals who wish to speculate on currency movements. The Forex market constitutes the largest financial market in the World, with traders placing in excess of $3.2trillion worth of trades every business day. It is the degree of activity therein that determines currency prices and makes them so fluid.
Currency is traded for a variety of reasons. To understand why prices fluctuate, it helps to know exactly what drives the market. Currencies are not sold in isolation but are paired with a second currency; for example, a Forex trader may trade the British pound against the US dollar. Alternatively, the trader may decide to trade the pound against the euro, or the dollar against the euro as a currency pairs.
During autumn 2009 the British pound traded at around US$1.57. Two years earlier, in November 2007, a pound would have bought almost US$2.07. It is the rating of currencies against one another that is the foundation of currency trading. In autumn 2007, the pound was relatively strong against the dollar. Two years later, the pound was trading much weaker against the dollar. These positions could easily reverse in the future, depending upon what is happening in the global economy.
It is the total level of Forex trading that determines how pairs of currencies fluctuate in value. In the above example, investors have bought more dollars and sold more pounds over the last couple of years which has led to a strengthening of the dollar against the pound. The future direction of this pattern will depend upon the economic indicators of both the UK and the US.
Investors engage in Forex trading in the hope of predicting the movement in currency pairings. It is these movements that enable the trader to make a considerable amount of profit; if they are able to correctly anticipate the currency pair’s movements that is. There has been a great deal of mystery surrounding Forex trading in the past, but that is no longer the case. The advent of the Internet has unlocked the secrets of Foreign Exchange, quickly turning Forex trading into a mass market activity. Now, just about anyone can open a Forex trading account to engage in the trading of a range of world currencies. All this from the comfort of their own home and without the need for a specialist broker.
If you are tempted in dabbling with online Forex trading, remember that currency values can go down as well as up and that you should only speculate with money you can afford to lose.