Foreign currency trading is necessary for international trade. It is also an arena for the speculator looking for profits as well as companies wanting to hedge currency risk in international transactions. A German company may wish to sell machine parts to a company in the USA. They will want to be paid in Euros. The US company will need to use foreign currency trading to convert dollars to Euros in order to pay. The companies will come to an agreement on a price, in Euros, for the machine parts and the US company will pay upon delivery. If any time lapses between agreement and payment the US company will run the risk that the US dollar will fall in relation to the Euro. This will make the machine parts more expensive than anticipated. How to trade Forex in this situation can be done two ways. The US company can immediately buy Euros with dollars and make payment when the parts are delivered. This will be a good solution when the wait is a few days. If the contract will take six months to execute, the US company will not want to tie up its capital that long. The other reason for not immediately buying Euros is that the price the Euro in relation to the US dollar might fall. In that case the US company will get its machine parts at a discount. The other solution in this type of foreign currency trading is to buy options.
Foreign currency trading with options allows the company to guarantee itself the current price of Euros in US dollars if it chooses to execute the contract. It will be, however, under no obligation to execute the options contract. Thus the company will simply let the contract expire and take its profits if the price of the Euro falls. It will execute the contract, buy Euros at the contract or strike price if the Euro rises against the dollar. Traders can use Forex technical strategies in foreign currency trading as another means of enhancing profits and limiting losses. As news hits the Forex markets traders react. Not only do all traders not react the same to the news but all trades cannot happen at once. Thus there is a degree of inefficiency in the foreign currency trading markets when the fundamentals change. By following technical price patterns a trader can often successfully anticipate price changes and trade accordingly.
In times of economic, political and social chaos foreign currency trading often has more to with finding a safe place for assets than for finding stellar profits. This usually has had to do with the dollar as a safe haven currency. The dollar for all of its problems is the currency of a democratic nation, a huge economy, and a stable society. This cannot be said for all currencies of the world. Thus when war breaks out in North Africa and political demonstrations occur in countries throughout the Middle East a common occurrence is that traders buy dollars, Yen, or Swiss francs until the situation stabilizes.
