Importance of Forex trading

Foreign Exchange [Forex] involves exchanging of different foreign currencies for a profit. The
reason for buying the currency of another country may be the need to buy some commodity of the
said country as well, besides making money through the difference in exchange rates.
In the latter case, people buy currency of a foreign country when the rate in the market is low, and
sell it off when the rates go up. Currency trading is usually done between the central banks, the
government, speculators and MNCs. Nations cannot trade with each other without the presence
of a foreign market.
A huge amount of money is daily traded in the Forex market, though the amount invested by an
individual trader may be very low. No one individually can have any influence on the Forex
fluctuations, not even the government. So it can easily be concluded that the level ofthe currency
reflects the strength or the weakness of the economy of a country. So this makes the Forex
market a good place for competition.
The government and the central bank do try to stabilize the currency of their country by
speculating, by buying and selling currencies at appropriate times. So they can influence the
market if they conduct a trade in huge volumes, though. To buy its own currency, however, the
government or the central bank must have huge reserves of foreign currency with them. So it is
virtually impossible to inflate the currency value artificially.
Banks trade a lot in foreign currencies and this forms a chunk of the volume in the Forex market.
They buy currencies not only as individual bodies, but also on behalf of their clients. They trade in
lots of futures. Till a few years back, the brokers could influence the volumes of trading in the
Forex market. But due to the electronic services available now, the services of brokers is not
required. It’s easy to operate electronically.
Trading with international countries is possible only with the existence of Forex markets. When
there is no Forex market, there is no common currency between two countries, so one cannot
evaluate the value of one currency with respect to the other.
The buyer pays the seller in the former’s currency. With the money so received, the seller buys
goods inthe buyer’s country and sells those goods in his [seller] country.