Speculation consists of opening positions in the market to make gains from changes in the price of the assets with which it is being traded. In the case of the Forex, the speculator buys a certain currency (long position) if it considers that the price of this will rise with respect to another and sells a currency (short position) if you believe that the price of this is going to decrease with respect To another (you have to remember that currencies are traded in pairs). Apart from the spot market for foreign exchange, the Options and Futures market also gives investors good opportunities to make profits through speculation.
Currently, speculation is the main activity of most agents engaged in currency trading. For the most part, speculative transactions are carried out by agents of bank and non-bank currencies, as a secondary activity to generate profits.
According to economic theory, speculation in the markets often plays a positive role in the economy. This is due to the fact that speculation increases liquidity, allows redistribution of risk and allows a smoother adjustment of prices with respect to the exchange rate circumstances that occur in the market. This is not the case of arbitration which, on the contrary, contributes to the equalization of the prices of the assets traded in the markets.
In the constant search for greater profit, speculators buy and sell in the market frequently and in large quantities, which often creates more liquid conditions. When markets have liquidity, prices tend to be more representative and change steadily to gradually adjust to the new prevailing circumstances.
An investor wishing to profit by speculating on the spot market must obtain at least one of the following conditions:
Have information that is not available to other investors in general.
Analyze existing information more efficiently than the average investor in the market.
Act on the basis of existing information faster than others.
To achieve this, the same investor must ensure the means that allow him to have the following requirements that every successful operator in the market must have:
Have timely access to any new information that directly affects market behavior.
Have the lowest transaction costs possible, for which it is important to look for the broker that offers the best operating conditions.
Having the means to tolerate the risk of loss, which is always present in every operation in the market. Many factors affect the market in one way or another, making it very difficult to predict most of the time. That is why the risk of loss is inherent in the market.
With respect to the strategies followed by investors who speculate in the market, there are many types. Many investors carry out transactions that last a few minutes or less while others open holding positions for days, weeks and even months. Speculators close their position when they believe that the gain will not increase further or when they consider that their level of losses can grow even more. Speculation in the markets requires the involvement of own funds, so it is not a suitable activity for anyone. It requires a very special type of investor who can calmly and safely deal with both losses and profits that can be produced very easily and in large quantities in markets such as the Forex.