The foreign exchange market, often referred to as the “forex” by traders, is the largest capital market in the world. Operating around the clock, the foreign exchange market is where banks, businesses, and private individuals trade currencies with the help of brokers such as Trade111 in hopes of growing financial capital. By taking advantage of the ever-changing exchange rates between currencies, investors in the foreign exchange market can invest in the economies of different nations, allowing them to profit off the increase in a currency’s value.
In the foreign exchange market, currencies are traded in pairs with the exchange rate describing the relationship between the relative demands for each currency. For example, in the Australian dollar – US dollar exchange pair, if there are more investors attempting to buy Australian dollars than US dollars, the US dollar will decrease in value relative to the Australian dollar. This is due to the increase in demand for the Australian dollar in that currency pair. An investor who foresees this possibility can earn a profit by buying Australian dollars prior to this increase in value. On a much larger scale, governments around the world can stabilize their own currency by purchasing vast sums of another nation’s currency to hold on reserve in the event of a financial crisis. These “reserve currencies” are often currencies of economically stable countries that can be relied upon to pay off debt. A hypothetical example of this could involve the swift depreciation of the Canadian dollar. If this were to occur, the Canadian government would be able to turn to its reserves of US dollars to pay off any outstanding debt. The US dollar would indeed be worth more in this situation, further lending to the usefulness of this strategy. Furthermore, by paying off its debt, the Canadian government’s credit would improve, allowing for the appreciation of the Canadian dollar.
In the 21st century, the emergence of digital currencies has allowed investors access to even more trading possibilities. Cryptocurrencies, unregulated digital currencies, are issued by no government or reserve bank. Instead, relying on blockchain technology, they form the basis for a new form of security, that is, crowd enforced security. Cryptocurrencies, such as Bitcoin and Ethereum, are highly volatile and liquid. This is advantageous to investors, who seek to time the market and gain off the unexpected fluctuations. Numerous strategies exist for cryptocurrency trading, many of which depend on the personality and risk tolerance of the investor. For investors that have a relatively low tolerance for risk, it may be helpful to try to minimize loss by investing a small amount of cash and having a determined exit price in advance. Others may purchase cryptocurrency as a speculation, being more willing to see where the market takes them. Most investment advisors advise their clients to identify their risk tolerance before diving into the vast ocean of currency trading.
Within this last decade, the advent of the smartphone has helped to bring the power of the foreign exchange and cryptocurrency markets to the average person’s fingertips. Smartphone applications, such as Coinbase, have made currency trading accessible to more people than ever before. Whether an individual investor or a large institution, trading in the currency markets provides the possibility of large capital gains not possible in the traditional world of stocks and bonds. The added diversification also helps to hedge against inflationary pressures, protecting the assets of the investor. Due to these factors, currency trading remains a valuable option for investors despite its numerous possible risks.