Contents

What is Currency Exchange?

Currency Exchange Market Characteristics

• Availability
• Leverage
• High volatility
• 24-hours activity
• Transparency
• High liquidity
• Transaction swiftness

Currency Exchange Market Players

Classification of Currency Exchange Instruments

• Major currency pairs
• Cross rates
• Cross rates of currencies with high potential
• Precious metals
• Stocks of large companies
• Commodities
• Futures
• Options

Summary

What is Currency Exchange?

The currency exchange market (also known as Foreign Exchange) is an international market meant for broker companies, banks, and investment funds trading currencies. The currency exchange market formed in the 70-s when the financial world passed from the gold standard to free currency pricing. The market works on the basis of free conversion of currencies without state interference and guarantees freedom of such transactions. At the same time, there are a number of rules and restrictions regulating the relationship between traders and brokers.

Sometimes one might hear it called monetary exchange; however, this is wrong. Currency exchange is an international non-stock exchange without a particular place for trading. One can trade via the Internet or using a telephone. Market players can make currency transactions from any spot on the globe. So long as the currency exchange is a non-stock exchange, transactions may go without registration.

Though currency exchange players do not have to worry about the place of trading, their work still depends greatly on trading hours which vary in different parts of the world: in Asia-Pacific, in Europe and in North America.

Starting 1989 Bank for International Settlements (BIS) carries out a thorough analysis of the market every 3 years. Data shows that the daily turnover of currency exchange was 1.5 trillion USD in the year 2000 and reached 4.0 trillion USD 10 years later. BIS experts forecast the growth of currency exchange daily turnover up to 10 trillion USD by 2020. Part of this volume is provided by margin trading which implies contracting for sums substantially bigger than the actual capital of one transactor. Regardless of the nature and the purposes of transactions, a large daily turnover guarantees high liquidity of the market. Another fact is that roughly 75% of transactions on currency exchange are conducted by American banks.

Currency Exchange Market Characteristics

The international currency exchange market is of one of the most numerous types of financial markets existing at present. At the same time, it is one of the largest markets. As other markets do, it attracts traders and investors offering them an opportunity to make a profit on the difference in exchange rates or just to exchange one currency for another. Every person making an exchange operation via a mobile bank application automatically becomes part of the scheme which connects the participants through various information systems and gives them access to currency exchange operations Monday to Friday 24 hours a day.

Currency Exchange has a number of advantages distinguishing it from other market types.

• Availability

To become a currency exchange player and get an opportunity to make a profit on the difference in exchange rates, one has to open a trading account in a company providing such services. Then one has just to replenish their account and start trading. It is worth remembering that successful trading requires some experience and certain knowledge of chart analysis. However, almost any person can integrate rather easily into the trader community.

• Leverage

When buying or selling currencies a trader does not need to have a deposit covering the price of the whole contract. Leverage will help enhance one’s financial potential because it allows for transactions amounting to much bigger sums than the trader possesses. On the one hand, this is an opportunity to earn a substantial profit with a modest sum on the account; on the other hand, risks grow accordingly. Thus, the risks are to be thoroughly studied and controlled.

• High volatility

Volatility means any changes in the price of an instrument. Currency exchange is a market of high volatility. Exchange rates are particularly quick to change, and a trader’s aim is to make a profit on their volatility. That is why the bigger the changes are, the bigger the trader’s profit, regardless of whether a currency is growing or falling in price, the latter phenomenon being yet another characteristic of the market. The truth is that traders can equally make a profit out of the rises and falls of currencies. That is why high volatility together with leverage provides an excellent opportunity for earning money. However, risks are to be taken into account.

• 24-hours activity

As mentioned above, it functions Monday through Friday 24 hours a day. There are always sellers and buyers on the market. One may use aggressive American sessions with crazy volatility as well as quiet Asian sessions with minimal changes in rates. Market analysis can be performed in the morning as well as in the evening; positions can be opened at any time in order to make a profit on currency volatility. This is a great advantage compared to the stock market which allows trading only during their trading sessions.

• Transparency

Market players can get full information about the market from any source. Important news influencing exchange rates are announced at dates and times known in advance. The market reacts, and traders answer to its movements. In other words, before the announcement of certain news (for example, unemployment rates) no one can tell what follows and how the market will react upon an expected event; before something happens everyone operates the same amount of data.

• High liquidity

The goods of an exchange market are money. It is considered to be goods of high liquidity which means one can easily exchange one currency for another at any moment. Low liquidity is typical of, say, real estate: an apartment can be sold quickly only if the seller requires a price substantially lower than the market price. In our case, a trader can always open a position on currency exchange at current rates and easily close it, because the exchange market is so vast one can find a buyer or a seller at any moment.

• Transaction swiftness

For opening a position and buying or selling necessary currency, it is enough to press the key “Order” at the terminal. In case one wants to close a position (for example, to lock in profits), it is enough to press the key “Close order”. It only takes a split second.

Thus, the currency exchange is rather different from other markets. It allows for quick access to trading and work from any spot on the globe at any time convenient.

Using a leveraged trader can make a transaction for a sum significantly bigger than the sum on their account. Exchange rates are changing constantly which provides another opportunity for making a profit. High liquidity allows for fast opening and closing of positions virtually at any moment.

Currency Exchange Market Players

The currency exchange is an international interbank market. In other words, the platform does not exist physically. All operations take place on the Net. Presently, major currency exchange players are national Central banks of different countries.

Classification of Currency Exchange Instruments

By trading instruments we normally mean financial assets one can trade in order to make a profit.

The currency exchange features a great variety of trading instruments, including major currency pairs and cross rates. They are arranged in a number of groups.

• Major currency pairs

The first one consists of major currency pairs, such as EUR/USD, GBP/USD, and the like. Among such instruments, most currencies are traded against the US dollar, which virtually guarantees excellent liquidity and volatility of any pair. According to certain data, transactions including USD comprise some 85% of all operations on the market, every step of a great number of traders giving more dynamics to the price. Major currency pairs have become so popular among players because they help figure out the dynamics of prices and make a profit out of it.

• Cross rates

The second group of instruments consists of cross rates, such as EUR/JPY, GBP/JPY, EUR/GBP, EUR/CHF, etc. These assets facilitate trading currencies of the 7 leading countries of the world avoiding USD. Such instruments have been created in order to provide for direct payments between the countries and enhance their relations. Pairs from this group also show good volatility and liquidity as well as acceptable spreads and attract a lot of traders.

• Cross rates of currencies with high potential

Cross rates of currencies of countries that have the potential for further development comprise a separate group of instruments, example being CAD/JPY (the Canadian dollar to the Japanese yen). Any pair in the group has particularities that let traders make a stable profit.

• Precious metals

The fourth group consists of precious metals. The most popular ones traded via USD are gold and silver. Precious metals are most popular among major market players that practically hedge their risks to avoid losses. In crises, these instruments receive particular attention. They are called “save havens”, and the prices for them normally grow in turbulent times.

• Stocks of large companies

The fifth group features a vast variety of stocks of large world companies. When buying a basic asset, a trader does not become its owner, rather, they agree to acquire the difference in the price. Such type of trading is available with CFD instruments. Unlike investors, traders can make a profit out of the growth of the price of their assets as well as out of the fall. Public assets of large companies are normally “transparent”, changes in their price are easy to forecast, thus they are highly popular among traders.

• Commodities

The sixth group consists of commodities, gas, and oil being the most popular instruments. The influence of hydrocarbons on the world’s economy steadily growing, and the interest in these instruments is more than understandable.

• Futures

The seventh group is comprised of futures. Futures strongly depend on the contracts between pairs, this being most obvious in primary producing countries where supply and demand are determined by seasonal changes and the current state of the market.

• Options

The ninth group consists of options. In the last few years, it has become rather popular to buy an asset (actually the right for it rather than the asset physically) at a certain price for a certain period (specified in the contract). These days binary options are of special popularity as they let the trader know the gain as well as the loss in advance.

Summary

Naturally, a trader has to pick up an instrument sooner or later. This is an important step in virtually defining the trader’s future on the market. What is more, it is worth keeping in mind that force majeure circumstances such as natural disasters, political instability, or major financial and economic crises are possible at any time.

Their consequences would be serious long-time fluctuations of most assets. To work effectively in such circumstances one has to have substantial knowledge and experience in trading. Studying fundamental approaches and technical analysis will do only good. But the key point in long-time successful and stable trading is to improve one’s skills and knowledge constantly.