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International currency markets
Forex trading is very unique where one will buy and sell a pair of currencies, for example USD/EUR, CHF/JPY and INR/YEN. It has about $1.9 trillion trades done on a daily basis.
Although it has a large amount of volume it was always reserved for institutional investors and international banks like UBS, ABN Amro, Citigroup, HSBC etc since its sale units were big sized. It has only recently been sliced into smaller parts and since 1998 available to the general public.
What is an International currency exactly? The international currency of various countries is not restricted and changes freely in an open market. Although there are some countries that still have their currency checked and put under constant watch for major changes. Countries that follow the system of open market policy where their currency gets affected according to the developments in the market perform much better than their regulated counterparts. Bank rates and monetary policy however affect the currency more than any other factors.
A currency is quoted in a particular format like EUR/USD would have two quotes 1.23/1.24, the first quote is the bid rate and it is the rate at which banks buy a currency from an investor and the latter quote is the ask rate and is the rate at which the banks sell a currency to a buyer. Since all trades are done without any sort of commission unlike stock trades the rates for buying would always be less that the rate for selling a currency.
An international currency is studied by fundamental and technical analysis to understand the scope of trading. In fundamentals the analyst studies the countries economic situation, government and bank policies. They also check for any natural disasters and speculators mood; basically they review the progress of a country. Technical analysis is done by monitoring the price moments of a currency in all trading arena's like commodity stocks exchange to derivatives trading. The price moments are captured and recorded and then analyzed to further predict the price trends.
With the introduction of electronic trading systems the entire face of trading for international currencies has changed making it more accessible to the general public in an easy to understand manner which is broken into smaller units making it affordable as well. The only disadvantage of dealing in electronic system is that it has increased the number of frauds happening in the market and the number of traders has been increasing sharply which increases trades done on speculation more than on fundamentals.
There have been many avenues open in the international currency markets such as arbitrage, hedging and normal day to day trading to speculation. Arbitrage is done when a trader finds a difference in the rates of a currency in the open market and the derivatives markets (futures and option). The difference in both the prices is called spread and most of the time this spread is very small hence for arbitrage to work profitably a trader needs to put in a huge amount of money to get a small profit but then this profit is guaranteed hence the trader doesn't lose anything in the trade. Hedging is done because the trader might have taken a particular position due to his business for example he might have imported goods for which he would need to pay in foreign currency(he would buy) and he could hedge (reduce) his risk by taking an opposite position(selling).