Forex is the largest market in the world, and the trades that take place in it affect every single thing right from the price of clothes imported from China to the price of margarita in Spain.
What Is Forex Trading?
In easy language, forex trading can be quite similar to the currency exchanges you do while traveling abroad. Currencies are traded in the foreign exchange market. Forex trading is conducted over the counter and a network of banks on a global level and other financial institutions oversee the market.
The majority of trading activities in the forex market happen between institutional traders. These traders don’t take physical possession of the currencies themselves, instead, they simply speculate about or hedge against future exchange rate fluctuations.
HOW DOES THE TRADING OF CURRENCIES TAKE PLACE?
All currencies are marked with a three-letter code much like a stock’s ticker symbol. Every forex trading is depicted as a combination of the two currencies being exchanged. The seven currency pairs that account for almost 75% of trading in the forex market are:
WAYS TO TRADE FOREX
There are three different ways to trade forex, which provide traders with intended goals:
In this market, currencies are swapped and exchange rates are determined in real-time, based on supply and demand.
Forex traders can also enter into a private contract with another trader instead of executing a trade right then and lock in an exchange rate for an agreed-upon amount of currency in the future.
Similar to the forward market, traders can choose a standard contract to buy or sell a predefined amount of a currency at a specific exchange rate at a date in the future. Unlike forward markets, this is done on an exchange rather than privately.
The forex market is open 24 hours a day, five days a week, which offers traders in this market the opportunity to react to the news that might not affect the stock market until much later.Because a lot is dependent on speculation or hedging in trading currency, traders need to be on track with the dynamics that could cause sharp spikes in currencies.
As forex trading demands leverage and traders depend on margin. There are other added risks to forex trading like constant fluctuations in currency prices, but in very small amounts, which means traders need to execute large trades to make money.
The leverage is great if a trader manages a winning bet because it can increase profits but sometimes, it can also increase losses, even if it exceeds the initial amount borrowed. Moreover, if a currency falls largely in value, leverage users open up themselves to margin calls, which forces them to sell their securities purchased with borrowed funds at a loss. On top of these possible losses, there’s a possibility that transaction costs add up and possibly eat into what was a profitable trade.
IMPORTANCE OF FOREX TRADING
The forex market has emerged as the largest financial market because of many noteworthy factors. The benefits of forex trading are:
The foreign exchange market is large and filled with traders from all around the world. The importance of the foreign exchange market is evident from the fact that more than $4 trillion is exchanged on an average in the currency market every day.
Good For Newcomers
It is the ideal market for First-time traders looking to make small investments as brokers offer a provision of demo accounts. Using these, beginner traders can test their skills in a market simulation before committing to any deals.
Round The Clock Market
Given that the forex market is global, trading can take place almost continuously as long as a market is open somewhere in the world. It operates five days a week, for 24 hours each day. The market opens from 5 pm on Sunday until 4 pm on Friday.
The forex market is considered the most liquid market in the world as it holds the largest trading activity around the world. Liquidity is the ability of assets to be bought and sold with little effect on their value. In the case of forex markets, liquidity allows you to trade with minimal risk.
A small development in geopolitics, economic stability, policies of the market results in a major shift in the market. This fluctuation in a market is called its volatility. When values of currencies change for the better due to any of these reasons, they result in major profits.
The foreign exchange allows retail traders to borrow against a small amount of capital and hence offers a chance to open a high position. The money raised from leverage is represented as a ratio.
As this market is comparatively new to the other markets, the major advantage of foreign exchange is that its participants have accepted technology happily with open arms. There is a varied range of software and mobile applications that help in trade in real-time from across the world.
The foreign exchange market does not have any restrictions on directional trading as in the stock market. Due to the high liquidity of currencies, brokers do not charge any transaction fees for trading that are required in stock markets.
TO SUM IT UP
The dynamics of the forex market make it stand out from other markets. If you are an experienced trader, you should definitely invest in the foreign exchange market.