What is Forex Trading Most Known for

What is forex trading in the minds of people… it’s an activity where traders make or lose millions in highly risky conditions where no one else fits.

The forex market is characterized by a community of independent traders staking their personal capital on speculative positions with a sufficient chance success that a measurable percentage actually profit from their endeavors. The allure of online trading has imbued it with a rarefied mystique, replete with gnomes and quant wizards who generate market movement from behind silk screens a-la Wizard of Oz. But this is not so, the market is actually made up of ordinary businesses, small and large, as well as millions of ordinary people. They are all forex traders more or less. Admittedly, some players have access to greater financial and computing resources, giving them something of an advantage. In some cases it takes meticulous planning and strategy to be able to profit from the currency market. And despite all the planning, the risks are equal for everyone.

Currency Trading is Essential and Good

The activity of trading has thousands of years of precedence, even if its humble origins were anchored in precious-metal-based lucre. National currencies were in fact backed by the value of reserved gold until around WWII but this soon created a problem. As the world started to recover from WWII economists in countries such as England came to the conclusion that the gold standard posed a problem. It simply made exports too expensive and manufacturers of exportable goods were unable to compete in the open market. That’s why the gold standard was abandoned and a free floating currency exchange rate mechanism was put in place. It evolved into what is now known as the forex exchange and functions relatively well in comparison with the previous fixed-rate gold regime.  The evolution of forex trading in the modern era has progressed from analog voice confirmation and execution to digital virtual marketplaces, dramatically expanding the set of traders in the process.

What is forex trading less famous for is the Carry trade. On pairs such as AUDJPY, the difference in interest rates was massive for many years. Being as high as 4% on AUD, and zero on JPY. Anyone who bought AUD and sold JPY, through a leveraged account, and knew how to hedge the price fluctuation risk through another currency, made effortless millions, literally! Because they got paid 4%, or close to 4% on one currency but had to pay zero on the other currency.

Forex Trading Today

Deep down, today’s market poses the same levels risks as any other business endeavour does. There’s nothing obscured or super secret about the currency market, at least no more than there is in classic trading, antiques dealing or real estate. Those in the know always profit in all these markets. The “forex market” is a concept implemented both in many different venues and platforms, both real and virtual. Traders, acting on forex signals engage in the entire range of commercial activity, from hedging physical position offsets to outright speculation. One example of a non-speculative forex transaction is initiation of a carry trade, in which money is borrowed in a lower interest currency and then lent/invested in a higher interest currency for better returns and the forex transaction sterilizes the risk to the initiator.