Forex and ai
Foreign Exchange is the economic system through which the industries of commerce, tourism, and finance conduct business on an international level.

Forex trading and AI — a brief introduction

Forex is the abbreviated word for Foreign Exchange. Foreign Exchange refers to the market which facilitates the trading of the different currencies of the world against one another. This is the economic system through which the industries of commerce, tourism, and finance conduct business on an international level.

What is forex?

Forex can be understood at the microscopic level in the case of foreign travel – say, an American tourist in China. The expenses he incurs while in the country must be met, for which he cannot pay in American dollars. So, a given number of dollars must be changed into the equivalent value of Yuan, the Chinese currency. From the micro to the macro levels, forex covers a broad spectrum of transactions.

The modern system of forex as we know it, had its origin in the Bretton Woods system, which was created after the Second World War, as a move to stabilize the global economy. By this system, the US dollar was pegged against the value of gold, and all other currencies valued against the dollar. This worked for a while until the different economies of the world grew or fell at different rates, affecting exchange rates and rendering the Bretton Woods system obsolete. In 1971, the system was ended, and a free-floating currency market emerged, with supply and demand determining the exchange rates.

Forex is the largest market in the world that functions as a decentralized institution. Commercial transactions particularly import and export, on a global scale are made possible through forex. For example, if a company in the USA wants to purchase cotton from India, the company must exchange the required USD to the equivalent value of INR in order to complete the transaction.

An important feature of forex trading is its accessibility. The forex market operates round the clock. Because one can sell or buy in very small numbers, transaction costs to brokers also amount to very little. From the major banks of the world to an individual looking to play the market for profits, the entry barriers for prospective participants are very low. Because of this reason, forex remains the most liquid assets market in the world.

How does forex trading work?

Some of the major forex zones are London, New York, Sydney, and Tokyo. Transactions are conducted Over the Counter (OTC) by means of a digital, computerized network of traders situated all over the globe.

Trading is done by buying and selling a pair of currencies. A currency pair consists of the base currency, against which the other currency or quote currency is compared. By such a comparison, the quantity of quote currency required for one unit of the base currency is determined. EUR/USD is one of the major currency pairs in the forex market.

Who does forex trading?

The participants in forex trading can be broadly categorized as follows-

Major banks

These are the commercial banks and investment banks which conduct the bulk of forex transactions. They are responsible for determining the exchange rates. Deutsche, Goldman Sachs, and HSBC are some such banks.

Major corporations

Big MNCs and businesses conduct their forex transactions through commercial banks. Major business mergers and acquisitions(M&As) can lead to fluctuations in exchange rates. M&As between companies based out of different countries also contribute to such fluctuation.

Government and central banks

These banks are engaged in handling the foreign exchange reserves, international payments, and monetary policies of the nation. Changes in monetary policies can have a direct effect on exchange rates.

Individual players

The individuals are mainly the speculators, who buy or sell with the view of gaining profit

What are the different ways in which forex trading is done?

Forex trading is carried out in three different ways,

Spot market

Spot trading is where transactions or “spot deals” are done for cash at the current price

Forwards market

Forwards market is where forex assets contracts are traded at the current rate for future delivery; the terms of the contract are determined by the parties involved

Futures market

Futures market is one in which standardized contracts are traded; a futures contract is an agreement to buy or sell an asset at a given date in the future, at a certain price.

Can artificial intelligence be used in forex trading?

Artificial Intelligence (AI) refers to the ability of machines like computers, to exhibit intelligence like humans. The past decade has seen AI grow and influence the way we make decisions, be it what restaurant to try or what routes to avoid. All applications are AI-driven and are constantly upgraded with the help of data procured and analyzed through AI.

The advent of Artificial Intelligence, with sub-fields like Machine Learning and Deep Learning, has significantly revolutionized every industry. Forex trading which is worth $1.93 quadrillion offers great scope for AI. In fact, in 1991 MIT Sloan Management Review published the article Managing Foreign Exchange for Competitive Advantage, prophesying the huge impact computers were going to have on forex trading in the future. An article published by Cambridge in 2005 also predicted that AI was going to be the future of trading.

Forex market is notorious for its high unpredictability and this is where AI comes to the rescue. AI helps to lower the risk of error, by collecting and analyzing real-time data. Predictive analytics and forex robots use algorithms to predict market trends with highly accurate results. Automated trading tools help traders to decide whether to buy or sell. Sentiment and luck have no part to play with AI, and so the error margin is considerably lowered.

That said, one cannot eliminate errors. For one thing, AI systems need constant monitoring and are liable to malfunctions. It is important to know what data are relevant, for real-time analytics to be effective. Amateur traders are prone to making mistakes and often end up being scammed by AI tools promising high returns.

Conclusion

AI is an exciting field, with innovations happening every day. With the forex market growing bigger and bigger, AI is the order of the future for market players. Are you looking for an AI solution that can help you ace your forex trading game? Try Brainalyzed Insight for free.

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