Forex Currency Trading

Forex currency trading may be swinging towards a rise in the dollar. Speculators have suggested that as US multinationals bring assets home to the USA that it will drive up the price of the dollar versus other currencies. To profit from Forex currency trading a trader follows the economic policy, monetary policy, and economic indicators of the nations whose currencies he trades. In addition, traders succeed in Forex currency trading by following technical indicators that help predict changes in market sentiment and subsequent price changes.
Forex currency trading has existed ever since the US dropped out of the
Bretton Woods currency agreement that lasted from the end of World War II until 1971. At that time currencies were left to float against each other instead of being pegged to the price of gold bullion. As relative currency values rise and fall traders make profits by buying one currency with another and then selling before the process reverses itself.
The basic reason Forex currency trading exists is to facilitate foreign trade. For a company in the USA to buy products from a company in Germany, Japan, China, Canada, or elsewhere the company must exchange US dollars for the local currency of the country is question in order to may payments. This occurs in a number of ways. A company may sign a contract for products and services and then just wait for delivery in order to exchange dollars for the other currency. However, the price specified in the original contract will typically be in the foreign currency. Its original value in dollar may change as currency rates change in Forex currency trading. If the dollar becomes stronger the company will pay less for its purchase. If the dollar slides in value the purchase will be more expensive.
Because the company in the example above does not know if the value of the dollar will rise or fall it may simply buy the required amount of the foreign currency when the contract is written. Unfortunately, the company will lose out on a discount if the dollar subsequently rises in value against the other currency. Thus the company may purchase options in Forex currency trading. How this works is that the company buys puts on the foreign currency. A put gives the company the right but no obligation to sell dollars for the foreign currency. The contract specifies this at the then current exchange rate. If the value of the dollar falls the company will execute the contract and exchange dollars for the foreign currency that the old rate. If the dollar strengthens the company will not exercise its option. Rather it will simply pay with stronger dollars in buying the foreign currency directly and save money.
Although Forex currency trading was set up to facilitate foreign trade it is an arena for currency speculators as well. Traders will currencies based upon fundamental and technical analysis of likely currency price changes. Traders may buy or sell directly or engage in options trading. The addition of speculators to the market tends to even out pricing and add liquidity to the currency markets.