Foreign exchange (forex or FX) is the market for exchanging foreign currency. Forex is the largest market in the world, and the trades that take place affect everything from the price while buying new sneakers from America to paying for an exotic dinner in Italy.
In simple terms,?forex trading?is familiar to currency exchange when someone travels abroad. The exchange rate constantly fluctuates based on supply and demand; traders purchase one currency and sell another. Forex is a global marketplace that operates 24 hours a day and five days from Monday to Friday. All forex trading is performed over the counter (OTC), meaning it does not require to be in physical form or to be physically exchanged. Most trade activity in the forex market is done between institutional traders such as fund managers, people who work for banks, and corporate people. These traders do not intend to possess these currencies physically; they theorize or are bound against fluctuating future exchange rates.
There are more than 170 currencies worldwide, and all the currencies are defined with a three-letter code. For example, U.S Dollar is a world-famous currency included in the forex trading market known as USD. The Japanese Yen (TJY), the British Pound (GBP), the Australian Dollar (AUD), the Canadian Dollar (CAD), the Swiss Franc (CHF), the New Zealand Dollar (NZD), and many more.
Like stock trading, forex trading is an attempt to buy currencies whose values may increase relatively or eliminate currencies whose purchasing power decreases.
To know more about the trading system, here are three ways to perform forex trading in real-time:
- The Spot Market –
The spot market is a public financial market in which financial instruments or commodities are traded for immediate delivery. The exchange rates in this market are based on the spot market, which is the largest in the forex market, where most forex trades are accomplished.
- The Forward Market –
The forward market is an over-the-counter marketplace where buyers and sellers set a price of derivative instruments tracking the underlying assets for delivery on the future date and time decided. In addition, the contract can be customized on the rate, quantity, date, and time
- The Future Market –.
In the future market, traders can opt for standardized contracts to buy or sell a commodity or predetermined amount of a currency at a specific exchange rate shortly.
The forward and futures markets are mostly the same because both target future earnings and investment rather than focusing on the immediate delivery of commodities or currencies.
Each market has its abbreviations and language. To know about the market and its strategies, here are some of the keywords to remember:
- Currency pair –
Traders use currency pairs as a price quote of exchange rates for two different currencies which are traded in the forex trading market.
- Lot –
Forex currencies are traded in ?lots,? a term known for a standardized unit of currency. Generally, the lot size of units of currency is 100,000, although there are mini lots which consist of 1,000 units, and significant lots, which comprise 10,000 units, available for trading.
- Margin –
Margin is a simple fund deposited by the trader to the forex broker, which is set aside to keep your balance and trade open. It is also deposited to cover any potential losses.
- Leverage –
In other terms of borrowing money, Leverage allows traders to participate in the forex market with the help of a broker who can offer the amount of money required.
Benefits of Forex Trading:
- High Liquidity:-
Liquidity refers to the ability of an asset to convert quickly into cash. For example, in forex trading, high liquidity means a large amount of money can be moved out and converted into cash or currencies with the help of small spreads.
- Low transaction cost:–
Transaction costs in the forex market are not explicit, as the markets have standardized commissions like the real estate market, organized security, and commodity exchanges. Instead, transaction costs are low, as it consists of the over-the-counter security market, and are collected primarily by brokerage dealers and giant commercial banks, in the spread between the prices at which they buy and sell the foreign exchange.
- A 24-hour market:-
The most significant advantage of the forex market is that it is a 24-hour market day. Trading is accessible and pretty much ongoing as a matter of fact, there is a market open somewhere in the world. The market is open from 5 pm EST on Sunday until 4 pm EST on Friday. At any given time, there is at least one market open and a few hours of overlap between one region?s market closing and the probability of another opening.
- Profit Potential from Rising and Falling prices:-
The forex market has no restrictions on directional trading, which means if someone thinks a currency pair will increase in value, they can buy it, and if they believe the value will decrease, then sell it. When someone buys a new currency and sells the other, no matter what, they can go long or short because the currencies are traded in pairs. For example, if a person is trading the British pound/ Australian dollar (GBP/AUD) currency pair. On the other hand, he would either buy the pound or sell the dollar if he thought that the value of the first currency, known as the base currency, would increase in comparison with the second currency, known as a quote currency. Or it can be performed vice versa if he thinks that the dollar’s value will increase in comparison to the pound.
If something has benefits, then it comes along with risks hand in hand: here are some of the risks that should be avoided and prevented:
Forex trading needs leverage, and traders use margins; there are additional risks in the forex market than other types of assets. Due to constant fluctuation in currency prices, although at a meager amount, traders execute large trades using leverage to make money. Using leverage is great if the trader makes the winning bet because it maximizes the profit, or it can turn into losses even exceeding the initial amount borrowed. Additionally, if the currency falls too much in value, traders open up to their margin calls, which may force them to sell their securities purchased with borrowed funds while facing a loss.
Regardless of being interested in forex trading, it is easy to get started and can be profitable in a short period. Although, the learning process is a bit curvy and steep, and traders face high risk and volatility. Traders must also have the desire and ability to take a risk, to monitor market conditions continuously, and to learn about currency trading strategies.