The term Forex Trading is actually a shortening of another phrase, Foreign Exchange Trading, and it refers to the practice of exchanging foreign currencies all around the globe. As you might expect, that makes Forex Trading the largest market to be found anywhere in the world. Trades that are made in Foreign Exchange Trading have a huge impact on the global economy, affecting virtually every consumable item sold to consumers today.
Without realizing it, you have probably participated in Forex Trading in a very small way yourself. Any time that you’ve visited a foreign country, you probably went to your local bank and purchased some of the currency needed for any countries you are traveling to. In essence, Forex Trading is simply buying one currency and selling another, subject to the prevailing exchange rate at the time.
Forex traders can be active 24 hours a day, and transactions are indeed carried out at all times. When making trades, they are all done over the counter, with no physical transactions actually taking place, and all transactions are subject to the oversight of global banks and other financial establishments globally. By 2019, the global trading volume for Forex had reached the level of $6.6 trillion, and you can assume that at the present time, it is considerably larger than that. Due to the all-encompassing nature of global trade and finance, Forex markets are routinely the largest and most complex in the world, and Forex assets also tend to be the most liquid.
By far the largest percentage of Forex trades are made between institutional traders, meaning those individuals employed by banks and other financial institutions. Traders generally don’t actually take possession of the currencies they trade for. Instead, most transactions are made as a hedge against any market fluctuations that might occur in the future.
The role of ethics in Forex Trading
The best way to become an ethical Forex Trader is to consider ethics right from the beginning of any foreign exchange transactions that you become involved with. It’s important to realize that foreign exchange trading involves much more than simply making a profit, and that it also involves ensuring the market retains the qualities of virtue and integrity.
It is the responsibility of those involved in foreign exchange trading to ensure that markets continue to function in a reliable and ethical manner. Some of the guidelines for conducting ethical foreign exchange transactions are described below, but there are numerous other resources where you can find out about becoming an ethical investor and trader.
- Preventing exploitation by banks – Banks will generally be privy to a great deal of information on the biggest foreign exchange transactions. This knowledge can be used to benefit the financial institutions themselves, apart from the activity of their clients. This often results in a client’s interests being basically ignored in favor of the bank making a profit. Banks are in a position to operate unethically because they have insider information about speculative transactions, in addition to being informed about other parties’ commercial transactions.
- Handling conflict – There is a fine line that foreign exchange traders must walk when dealing with confidential or anonymous trading. Legal personnel as well as credit personnel must receive all information required and evaluate any risk to counterparties. This is a delicate trading area that must be handled as ethically and forthrightly as possible.
- Regulatory bodies in the Forex market – There is no actual central regulatory body in the foreign exchange trading market, as such. In place of this, all regulations are issued and carried out by local level bodies all over the world. Each of these bodies is obliged to follow laws governing their own specific jurisdictions, and they will conduct occasional audits and inspections of the activities of foreign exchange trading. They also do their best to guarantee that brokers abide by the same ethical rules as traders, and if brokers stray from this practice, they can be sanctioned by a regulatory body.
- Guidelines for Foreign Exchange Trading – This is the actual name of a document that provides a collection of practices to foreign exchange traders, including a comprehensive list of activities that are allowed and those that are disallowed in the world of Forex Trading. This is a great resource for traders to keep themselves informed about guidelines which may be new, or which have changed recently.
- Forex regulation – At the present time, there is no formal regulation governing the Forex Market, which means it is incumbent upon professionals to police themselves and to call attention to unethical practices they become aware of. When unethical practices are discovered, it’s most likely that those involved will be subjected to some kind of penalty.
- Management of operational risk in foreign exchange – This is another formal document that has been compiled for professional traders and will help Foreign Exchange Trade participants conduct their operations more ethically. It has a list of more than 50 of the best trading practices used by traders today.
Originally, foreign exchange trading was primarily conducted by major commercial banks, although that has now evolved into a somewhat different scenario. Nowadays, Forex is managed by investment traders all over the world, as well as some commercial banks. Forex Trading can be a profitable enterprise for anyone involved in it, but it is important to keep the ethical component in mind at all times when trading.