Currency trading refers to the action of exchanging a given currency for another at a pre-arranged price. Currency trading is the most common form of financial trading in any country. Currency trading involves buying one currency while at the same time selling another in order to raise the market speculation (Farmer and Joshi, 2002). The values of foreign currency appreciate and depreciate according to the financial conditions in a country. This is influenced by several factors such as geopolitics and economics. Forex has the key objective of attaining profit from the currency exchanges that occur in the financial markets.
Forex sets prices through speculation on the possible turns in the currency markets. Over- the- counter currency markets do not operate like the mainstream currency markets. This is because the operations are carried out throughout, 24 hours each day. The system operates through an intricate connection of persons, corporations and financial establishments. These systems make currency rates to rise and fall relative to one another giving numerous choices to investors (Cai and Zhang, 2014).
Forex is very popular across the world today. This is mentioned to be the result of constantly engaging in currency trading on 24 hour basis on each day. In New Zealand, the constant engagement in currency trading is recognized as the reason behind the limited price gapping. However, it is also reported that periods of inactivity in the market results in a widening of the market spreads. At the same time, the currency market is leveraged in New Zealand, hence realizing the potential of gaining and/ or losing in comparison to conventional currency trading practices. Stop losses are measures that can be taken to prevent potential losses in currency trading. This is achieved by stopping or terminating the broker once services fall below a certain speculated level. In this way, further losses are prevented by the systems (Olsen and Stumm, 2006).
Currency trading offers many advantages in comparison to other conventional trading forms. For instance, currency trading is easily comprehensible as it involves only two pairs if commodities at any given time. In addition to this, currency trading requires a lower capital outlay compared to other forms of trading. It is also a continuous market process and is more liquid than other trading forms. The costs of transactions at the currency market are also significantly lower than in other businesses and the market is characterized by great transparency. Instant business executions and efficiencies make it possible to analyze the key economic variables associated with currency trading. The application of the right strategies in the currency market makes it easy to reduce the risks associated with currency trading (Neely and Weller, 2013). In order to improve currency trading, the key aspect is to plan the direction that the trading is intended to take prior to engagement.
Various strategies can be used by organizations to gain an edge in currency trading. The most common are trend following ad hedging. In both strategies, the objective of the traders is to reduce the probability of loss through predicting future trends and cushioning oneself. Speculation is another strategy where investors purchase their financial assets based on the speculated behavior of currencies in the coming years (Hsu et al, 2005). Technical studies carried out on investor behaviors as well as on the effects of various actions on the financial markets determine the success of the currency trading. Following technical analyses, the investor sentiments form crucial factors in price determination and identification.
Cai, C. X., & Zhang, Q. (2014). High‐Frequency Exchange Rate Forecasting. European Financial Management.
Farmer, J. D., & Joshi, S. (2002). The price dynamics of common trading strategies. Journal of Economic Behavior & Organization, 49(2), 149-171.
Hsu, W., Hsu, L. S., & Tenorio, M. F. (2005) (Eds.). A neural network procedure for selecting predictive indicators in currency trading. Neural networks in the capital markets. New York: Wiley, 245-57.
Neely, C. J., & Weller, P. A. (2013). Lessons from the evolution of foreign exchange trading strategies. Journal of Banking & Finance, 37(10), 3783-3798.
Olsen, R. B., & Stumm, M. (2006). U.S. Patent No. 7,146,336. Washington, DC: U.S. Patent and Trademark Office.
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