What is forex, in particular retail forex trading? Retail forex trading is the term used to refer to over-the-counter foreign currency transactions done through leveraged trading as facilitated by participating online forex brokers. In essence, retail forex represents the speculative side of foreign exchange most of those who engage in it are there to speculate for profits and have no inherent interest for the currencies they buy or sell.
What is forex and why is it popular? The high leverage provided by brokers is what attracts investors to participate in forex trading. These investors are willing enough to risk their small capital for a chance to gain a hundred fold from highly leveraged foreign currency transactions. Many of them engage in retail forex trading without really understanding the risks they are taking. They close one eye to the risks and open the other to the prospects of making huge gains and take the role as speculators.
Retail forex trading is adding more volatility to the market as more and more speculators participate and push exchange rates frequently to limits that are no longer reflective of existing economic fundamentals as they often trade on the basis of their perception on future economic data.
Economists have often questioned the role of speculators in the forex market place. They consider them as an anomaly as they tend to distort the real value of the currencies by trading on perceived conditions and not on actual existing data. On the other hand, brokers welcome the participation of speculators in the forex marketplace as they are able to spread the risks associated with the ever increasing volatility of foreign exchange rates. Without the speculators, they will have to take the brunt of the entailing risks which they may not be able to sustain in the longer term as the volume of foreign currency transactions keep on going up.
What is forex and how can one enter the market? The very reason why forex brokers opened up OTC forex transactions and offered leverage trading is to attract participation from new individual investors. To them, these individual investors are a necessity so as to maintain the liquidity in the market place as well as to thinly spread the currency risks.
However, a great number of these speculators use their natural gambling instincts a lot and would normally pour in their resources where their instincts lead them regardless of any existing fundamentals. As a result currency rates do not at times reflect the real value of a currency based on underlying fundamentals. Central banks have to even step in every once in a while to stem the volatility in the market place.
On the other hand, the foreign exchange market as with other financial markets existing today are bound to be reflective of underlying fundamentals at certain points in time despite bouts of volatility. Buying or selling may be overdone every so often but the market is definitely bound to settle down to their real levels soon after as most of the market players start realizing a market action may have been overdone. This is the dynamics of an efficient marketplace and the very stuff that serves as impetus for growth and development of any economy.