The purpose of me writing this article is to give you an impartial opinion about foreign exchange market and give you a bit of information about trading in FX market if you are planning to on investing any of your hard earned money. The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. With the exception of weekends, financial centers around the world trade between a wide range of different types of buyers and sellers around the clock.

The purpose of these foreign exchange markets 'Forex' is to assist international trade and investment, allowing businesses to convert one currency to another. Even though a business's income is in U.S. dollars, the foreign exchange market would permit a U.S. business to import European goods and pay in Euros.

Some experts believe however, that the unchecked speculative movement of currencies by large financial institutions such as hedge funds impedes the markets from correcting global current account imbalances. This carry trade may also lead to loss of competitiveness in other countries. Typically in foreign exchange transactions a party purchases a quantity of one currency by paying a quantity of another currency.

Here are some reasons why the foreigh exchange market is unique

• Trading volume results in market liquidity
• Geographical dispension
• Continuous operations 24/7 except weekends
• The variety of factors that effect exchange rates
• The low margins of relative profit compared with other markets of fixed income.
• The use of leverage refers to the refers to the use of debt to supplement investment.
• $1.005 trillion in spot transactions.
• Turnover in global foreign exchange markets is estimated at $3.98 trillion
• Trading accounted for $3.21 trillion of this amount
• $362 billion in outright forwards
• $1.714 trillion in foreign exchange swaps
• $129 billion estimated gaps in reporting

The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions, and the average daily volume in the global foreign exchange and related markets is continuously growing.

Trading in the Forex market include, Financial markets,Bond market, Fixed income, Corporate bond, Government bond, Municipal bond, bond valuation, High--yield debt, Preferred stock, Common stock, Registered share. Other markets would be Derivatives market, Foreign exchange market, Commodity market OTC market and many more.

Here are some Determinants of FX rates

The following theories explain the fluctuations in FX rates in a floating exchange rate regime--which is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. Or in a fixed exchange rate regime--which is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency. The FX rates are decided by its government.

International parity conditions

Relative Purchasing Power Parity--is an economic theory which predicts the relationship--between the two countries' relative inflation rates and the changDomestic Fisher effect--In economics, is the proposition argued by Irving Fisher that the real interest rate is independent from monetary measures, especially the nominal interest rate. e in the exchange rate of their currencies.

Interest rate parity--sometimes incorrectly referred to as the International Fisher effect, is an economic concept, expressed as a basic algebraic identity that relates interest rates and exchange rates.

International Fisher effect--which says that the difference in the nominal interest rates between two countries determines the movement of the nominal exchange rate between their currencies. Basically, these theories falter as they are based on assumptions which seldom hold true in the real world. But to some extent the above theories do provide a logical explanation for the fluctuations in exchange rates.

To sum things up:

Trading in the foreign exchange market, whatever the currency could be a very profitable investment if you have some extra money to invest--Just remember, about 70% to 90% of the foreign exchange transactions are speculative.

In other words, the person or institution that bought or sold the currency has no plan to actually make delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency and Hedge funds for instance have gained a reputation for aggressive currency speculation since 1996.

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