Foreign Exchange Market Trading: Everything You Need to Know Before Investing

Posted by Sonal Mistry on 5/25/21 10:33 AM

Collectively turning over trillions of dollars in value on a daily basis, currency trading through foreign exchange markets is a global activity engaged in by a variety of stakeholders, including institutional investors, central banks, hedge funds, and retail traders. 

Foreign currency exchange market trading, widely known as FX trading, is one of the world’s most active financial markets, where stakeholders can buy and sell currencies on electronic trading platforms based in the world’s financial centers, from 5 p.m. EST on Sundays until 4 p.m. EST on Fridays. As it does not have a centralized physical location, the FX market is both more decentralized and more dynamic than other financial markets. 

The Global Currency Market Trading Environment

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The international foreign exchange market is best understood as a global trading environment where market participants fall into one of two categories. 

Currency trades between central banks form what is known as the “interbank market,” which compromises few members but is responsible for a huge trading volume. The value, volume and direction of these trades plays a large role in determining currency prices. 

The second category, known as “over-the-counter” (OTC) trading, is composed of companies and retail traders. In recent years, new players have flocked to this sphere. These newcomers have joined an already crowded market, with the hope of seizing the opportunities provided by limited international regulation and the ability to leverage positions. But, retailers and corporate traders must be cautious in this space, as the risks involved with certain trading strategies are substantial. 

A Little History: Watershed Moments in International Currency Markets 

Trading one currency for another is a practice that has been going on for centuries, but modern FX trading has a much shorter history. The world’s current foregin exchange market system really only traces its origins to the 1970s. 

This decade saw major upheaval in the ways that currencies could be traded for one another. The government of the United States ended international convertibility of the U.S. dollar to gold in 1971, and there were international efforts to reform the international money supply and currency trading system. Later that year, the so-called “Group of Ten” (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States) signed the Smithsonian Agreement, ushering in the modern era of FX trading. 

In the United States, the Chicago Mercantile Exchange served as the take-off pad for this new international system in 1971, as it was the first in the country to allow FX trading. By the 1980s, floating currencies had become the international standard for developed countries.

Understanding Foreign Exchange Market Trading

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Navigating the tumultuous waters of the international foreign exchange market trading system is a risky endeavour. But it is because of the substantial risks that the rewards for success in this space can be so great. There is no single investment industry regulatory organization that can oversee forex trading on a global scale, which is why there is a lack of standardization for forex instruments and regulations. 

At the highest level, interbank FX trading is managed through self-imposed industry regulations, as well as internal policies and guidelines, that the banks agree are necessary to protect themselves and collectively manage their risk responsibly. 

At the retail level, the market consists of relatively small currency traders, brokers and dealers with an inconsistent regulatory environment. Depending on the location of the broker or dealer and their trading platform, there could be government or industry regulations in place, but they vary widely from place to place around the world. 

Balancing Risks & Opportunities in Foreign Exchange Trading

In terms of volume and liquidity, foreign currency trading dwarfs other markets, allowing for many opportunities to enter or exit positions and exchange currencies profitably using a variety of trading strategies. Because trading forex is possible around the clock during the week, the trade flows in forex markets offer a huge number of untapped opportunities. 

Succeeding in forex trading requires a strong understanding of macroeconomic fundamentals, as well as the ability to collect and apply market research efficiently and effectively. There are many reasons why an foreign exchange rates for one particular currency or another could be affected. Buying and selling currencies on the international forex market requires an understanding of currency price dynamics, foreign trade policies, forex market news and a holistic view of the global trends affecting major currencies. 

Forex trading is fraught with risk because FX markets allow traders to use a high amount of leverage and trade on margin. By making use of financial instruments of this nature, traders can open themselves up to much more exposure than they normally would using their own limited capital. This aspect of forex trading offers the tantalizing prospect of huge profits, but the potential losses can be catastrophic in some cases. 

A Partnered Approach to FX Market Trading

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For many mature investors and international business owners, forex markets have long been avoided because they were deemed too risky. Despite the opportunities, the lack of security and compliance controls in the FX market meant that stakeholders who could benefit from solutions for global currency transactions simply stayed on the sidelines. 

At Olympia Trust, we earn the trust of our partners because we have shown throughout our 20+ year history that we provide the highest level of service, security and compliance. Our compliance team and account managers work together to understand the intricacies of each business and investment environment to develop FX custom solutions that improve efficiency and create new opportunities for revenue through foreign exchange market trading. 

The Security Advantage You Can Trust 

Unlike certain forex trading merchants, Olympia Trust is a provincially regulated trust corporation. Abiding by the Loan and Trust Corporations Act, our compliance team has developed an intimate understanding of the regulatory environment, thanks to exhaustive due diligence. This allows us to minimize the potential risks involved with sending or receiving foreign currencies in large transactions. 

When you use our FX trading platform, you get the peace of mind that comes with knowing your funds are absolutely secure because all transactions are held in a segregated trust account until the transaction is complete.

Want to learn more? Visit our site and find out how you can get started.

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