Currency Trading Markets: Essential Facts a Trader Must Know

Article by Alex DeGuzman

Currency trading markets around the world serve as trading anchors and worldwide decentralized markets between buyers and sellers of different currencies. The values of the traded currencies are speculated by the participants. When you participate in a foreign exchange currency deal, you buy one currency and pay in another currency.

As background info, the currency trading market originated in 1944 after World War ll with the institution of the International Monetary Fund. It tied up the major currencies to the US Dollar which was the least affected at that time. Subsequently, the market was converted to a global free floating currency system in 1978.

In view of the technological advancements provided by the computer and the internet age, the speed of international monetary transactions greatly increased. In the foreign exchange market, the most traded currency pairs are the EUR/USD, USD/CHF, GBP/USD and USD/JPY. So far, the UK has the biggest volume of trading in currency followed by the United States and Japan.

According to reliable estimates, the trading center in London, UK has accounted for an increase in foreign currency transactions from 34.6% in 2007 to 36.7% in 2010. This is why the London market price is the usual quoted currency price in FX trading. The New York, HongKong, Singapore and Tokyo are also very important currency trading centers which transact with banks all over the world. Currency trading goes on systematically. As the Asian trading session finishes, the European session starts. Then, the North American trading session follows and it completes the cycle. Then it goes back to the Asian session.

When it comes to the market participants, they are composed of central banks, commercial banks, investment companies, hedge funds speculators, money remittance companies, non bank forex companies, forex fixing groups and the individual retail speculative traders where you can belong. The retail investors segment has grown rapidly due to entry of retail forex platforms. This group usually trades through brokers/dealers or banks When you deal with a broker, he tries to negotiate the best price in the market for a transaction and charges a mark up fee. You can deal with various dealers particularly those who have connections with the large forex trading banks. These dealers usually get better pricing due to their large transaction volumes. The biggest currency trading banks as of May, 2011 are the Deutsche Bank, Barclays Bank, UBS AG, Cityi, JP Morgan, HSBC, Royal Bank of Scotland, Credit Swisse, Goldman Sachs and Morgan Stanley.

If you are serious in getting into forex trading, knowing some historical facts will be of some good use to you. Trading volume had jumped from a billion dollars a day in the eighties up to almost trillion a day. According to the latest figures, from daily trading volume of trillion, it has grown to over trillion broken down to .4 in spot transactions, 5 billion in outright forwards, .765 trillion in foreign exchange swaps, billion in currency swaps and 7 billion in options and other products. In 2010, can you imagine that retail trading has grown up to 0 billion volume a day?

The phenomenal rise of electronic execution technology and the various transaction centers have reduced execution costs, developed bigger liquidity and attracted more participants. With the use of online electronic trading, transactions and executions became a lot more convenient for retail investors to trade in the foreign exchange market. Foreign exchange rates are governed by market psychology perceptions, economic factors as well as political conditions. Well experienced forex traders always keep themselves updated with latest developments. Marked by the market’s extreme liquidity, it has become a global and popular trend among the retailers group composed of individual traders to invest in currency trading markets.

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