The foreign exchange market, also known as the FX market, is not one centralized market. Instead, it is made up by numerous market places, from the big interbank currency market to small retail FX trading platforms. Governments, banks, corporations, organizations and individuals all need to exchange one currency for another for various reasons, and their needs have created opportunities to make money on trading currencies. Today, the FX market is also largely driven by investors and speculators who are in it solely to make a profit from the currency trade. Speculators and investors do not exchange one currency for another because they actually have a need for a certain currency – they do it to make money or to manage risks (hedging).
The forex market is typically quick to react to news, which means that you need to be even quicker if you want to make a profit. Although, it is also possible to employ strategies that doesn’t need to be executed immediately after the news release, e.g. making a purchase when the price of a currency has falled quite a bit because of news, with the assumption that the market will bounce back again eventually after the initial knee-jerk reaction to the news.
In our modern world, economic data is released seven days a week and it is difficult to keep on top of everything. China does for instance have a habit of releasing important news on Saturdays and Sundays. Add to this all the news that aren’t expressively economic news but will impact the FX market anyway, e.g. results of political elections and referendums, major outbreaks of violence, etc.
It is important to remember that the FX market can react strongly to being surprised. Let’s for instance assume a scenario where an important economic rapport is to be released by a nation’s government. Economists are predicting that the report will show 4% growth. When the report is released, it shows 3.5% growth. Instead of reacting in a positive way – 3.5% is not a poor growth rate – the FX market reacts to the discrepancy between 4% and 3.5% and the price of the national currency drops sharply in relation to most other major currencies. For the next governmental rapport, a predicted 2% growth turns out to be a 2.5% growth and the national currency is strengthened, despite the fact that a 2% growth is worse than a 3.5% growth.
Options
If you don’t want to buy currency directly, you can buy currency options or binary options based on currency pairs. A call currency option will give the holder (you) the right, but not the obligation, to buy a certain amount of the stated currency at a stated future date or dates, for a predetermined price. A put currency option works the same way, but the holder (you) has the right but not the obligation to sell.
A binary option is more simple. You can for instance purchase a binary option that will pay you $100 if the USD/GBP exchange rate, as published by Bloombergs, is above 0.800 when the option expires. With a binary option, you know in advance exactly how large your profit will be if the binary option expires in the money.