An Introduction to Forex Trading – News
Foreign currencies are traded on the global decentralized foreign exchange market – the largest and most liquid financial market of all. On weekdays, it is active around the clock, and the currency is equal to 6.6. Trillions of dollars are traded on an average trading day.
The most traded currencies in the global forex market are the US dollar (USD), euro (EUR) and Japanese yen (JPY). All three represent huge savings.
Examples of major players in the foreign exchange market are central banks, private banks, hedge funds, institutional investors, financial companies and large corporations that need specific currencies to make purchases abroad or pay in foreign currencies when selling their products.
In the 21st century, the advent of the Internet and e-commerce has made it possible to be active in the forex market even as a small-scale amateur trader with a small bankroll. With retail forex brokers that cater to micro and nano traders, you can start with as little as $10.
To understand the forex market, it is important to understand the concept of currency pairs.
Example: The EUR/CAD currency pair consists of the base currency Euro and the quote currency Canadian Dollar.
In the foreign exchange market, you buy one currency and pay with another currency.
What is the most valued currency right now?
Although the US dollar and the euro are the two most traded currencies in terms of volume and total value, this does not mean that they are the most valued currencies compared to other currencies.
At the time of writing, 1 Kuwaiti Dinar (KWD), for example, is trading at 3.24 USD, and if you want to buy 1 Bahraini Dinar (BHD), you will pay 2.65 USD.
Below we will look at a few currencies that (as of 2022) all have a market capitalization greater than 1 USD.
Kuwaiti dinar (KWD)
It is the official currency of Kuwait and currently the strongest currency in the world. It was introduced in 1961 when it replaced the Gulf rupee. When it was created, 1 Kuwaiti dinar was equal to 1 pound sterling.
Kuwait’s export economy is very strong due to the country’s rich oil reserves. Kuwait is heavily dependent on its oil exports, which represent more than 80% of its GDP. Kuwait has one of the lowest unemployment rates in the world and no income tax.
The Kuwaiti Dinar has been pegged to various foreign currencies in the past and today is pegged to an undisclosed basket of currencies.
Bahraini Dinar (BHD)
Like Kuwait, Bahrain is located in the Middle East and its economy is highly dependent on its oil extraction and export. Bahrain’s oil and gas industry accounts for around 85% of the country’s revenue.
The Bahraini Dinar became the official currency of Bahrain in 1965 when it replaced the Gulf Rupee at 1 BHD = 10 Gulf Rupees. That said, the Saudi Riyal is also considered legal tender in Bahrain and the exchange rate is fixed at 1 BHD = 10 Riyal.
Since 1980, the BHD has been pegged to the SDR, an international reserve asset (not a currency) created by the International Monetary Fund (IMF).
Omani Rial (OMR)
Located on the Arabian Peninsula, the Sultanate of Oman has a fairly diversified economy compared to many other countries in the region, but the oil and gas sector still accounts for around 30% of nominal GDP.
The Omani rial replaced the Gulf rupee in 1970 but was then called the rial saidi, a name it retained until 1972.
The price of the Omani Rial is fixed at $2.60 for 1 USD.
Jordanian dinar (JOD)
The Jordanian Dinar is the official currency of Jordan and is legal tender in the West Bank region.
The Jordanian dinar was introduced in 1950 to replace the Palestinian pound. It is currently pegged to the IMF SDR.
Unlike the situation in Kuwait, Bahrain and Oman, Jordan does not derive most of its GDP from oil. It was notably the first Arab country to establish a free trade agreement with the United States. Jordan joined the World Trade Organization in 2000 and signed the Jordan-US Free Trade Agreement the same year. The country enjoys advanced status with the European Union.
British pound (GBP)
The pound sterling is the official currency of the United Kingdom and its associated territories. The pound is the main unit of the pound sterling and one pound is divided into 100 pence. The term “British Pound” is popular colloquially but not the official name of the currency.
The British Pound is the fourth most traded currency in the world after the USD, EUR and JPY. It is one of the five currencies that make up the basket of currencies used to calculate the value of the IMF SDR.
Algorithmic Forex Trading
A significant difference between 20th century forex trading and 21st century forex trading is the proliferation of algorithmic trading in our century.
Algorithmic trading relies on specialized software to open and close positions when certain market conditions are met. The software is programmed with a very specific set of rules according to the wishes of the trader. Examples of items included in scheduling are resources, price, quantity, and time.
One of the reasons algorithmic trading is so popular is that it reduces the human labor time needed to analyze the market and place trades manually. This results in lower costs in terms of salaries and the like.
Algorithmic trading software can quickly process large amounts of market data, spot opportunities, and place orders. Among other things, it allows effective use of arbitrage opportunities even when they result from minute price discrepancies. Trading software can be used to quickly identify and exploit opportunities in what is known as triangular arbitrage, where a currency is converted into itself through several different currencies.
Algorithmic trading has been criticized for increasing the power differentials that exist between different market players. When only a few traders have the resources to obtain and use the most sophisticated trading software solutions, it can fragment the market and affect liquidity.
Examples of different types of algorithmic trading in the forex market
Statistical algorithmic trading, also known as algorithmic strategy trading. The software identifies suitable trading opportunities based on statistical analysis of historical time series data. Algorithmic execution strategies aim to achieve a predetermined goal, such as trading faster or reducing market impact. Self-hedging Trading rules are created by software to reduce a trader’s risk.
What is High Frequency Trading (HTF)?
High frequency algorithmic trading is much faster than other forms of algorithmic trading. It is characterized by trade orders being executed at a very high pace and speed. Successful HTF traders typically use specialized software to trade within milliseconds of a new price move.
High-frequency trading is known to exacerbate market flash crashes, an early and notable example being the stock market crash of May 6, 2010. Many experts warn that HTF can have similar effects in the forex market under similar conditions , although there are fundamental differences between the forex market and the stock market.
To prevent HFT software from making stock market crashes worse, it can be monitored by humans or programmed to automatically halt trades during market turbulence. Of course, the simultaneous suspension of trades by many large market participants can cause problems for the market, as liquidity will quickly decrease.
Can Retail Traders Do Algorithmic Trading?
Yes, algorithmic trading is within the reach of even small-scale retail traders in the forex market. Several different retail platforms offer it, either as an integrated service or by allowing and supporting third-party software solutions.
Before risking real money, we recommend that you try using a free demo account filled with play money. Many brokers will allow you to open such an account with them, and it’s a great way to learn more about algorithmic trading without losing your hard-earned money while figuring things out.
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