“Forex” is the market where one can buy, sell and exchange currencies. This market is one of the largest profit-making markets in the world and which is more liquid (that involves cash). Banks, businesses, traders, governments and individuals make transactions to exchange and speculate on the price of one currency over the others which is called “Forex trading”. Forex is also called “Foreign Exchange” market. Any individual can make transactions at any time of the day because it is open 24 hours and five days a week. No central market is available for forex and the trading is done generally “over the counter” (which means the trading is done through a “dealer network” rather than on a centralized exchange). Trading in forex is done enormously in the financial centers like New York, Singapore, Paris etc. Learn more from the škola Forexu
Participants in forex and their purpose of trading:
Banks-Banks make a lot of speculations on the currencies over the market and a million-dollar trading is done by them.
Companies-Companies trade in forex to buy the goods and services from other countries and to sell them to other countries.
Central Bank-Central bank plays a vital role in forex to control the money supply and inflation.
Individuals-When any person exchanges his country’s currency with the other country’s, it is a forex trading.
Investors-They use the market to buy foreign securities.
Factors that affect The Forex Market:
Political Factors – An election, especially the elections of the president or the prime minister of a country has a huge impact on the forex market. Because the forex market depends on the monetary policy, imports and exports and interest rates of a country and when a new government is elected, all these policies are changed and this affects the market rates all over the globe.
Natural Calamities-When a natural disaster hits a country like an earth quake, tornado or floods, the government of the particular country in which a disaster strikes, has to spend a massive amount on rehabilitation and reconstruction activities and it may not have a chance to concentrate on the forex market. So, this may disturb the market globally for a brief amount of time.
International Relations-The economic relations among the countries also has an impact over the market. Good relations cater for more trade and more investment options which make a country profitable.
Manmade disasters – Disasters caused due to manmade activities like wars, cyber-attacks will also have an impact on the market as this lowers the participation rate in trading.
Ways of trading forex:
According to the škola Forexu, there are three ways of trading forex: Spot market, Forwards market and Future market.
Spot market-The spot market is the most preferred one and surpasses forwards and future markets. In this, the currencies are traded according to the current price. That price is determined by the supply and demand and finally a deal is made which is called “spot deal”.
Forwards market-In this, the contracts are bought and sold over the counter between two parties and the two parties make the deal.
Future market-The future contracts are bought and sold based on a standard size and settlement date on the public commodities market.
There are generally two ways of trading forex.
- To buy and sell currency pairs in speculation like stocks.
- To buy derivatives like options and futures that tracks the movements of specific currency pair and to make profits from the changing currency values. An “options” currency pair enables one to buy before the set point of time and the “futures” currency pair enables one to buy the pair in set point of time.
Selecting a forex broker:
As we said that there is no central market place and a forex broker is required, one must be careful in choosing the right broker.
- Regulatory Compliance-A forex broker must make sure that he is making all his clients, that is the traders and the investors to comply with the regulations properly. One must also check the integrity of the broker before one decides to open the account.
- Account Details-One must be careful in choosing the various types of accounts offered by the brokerlike initial deposits, commissions and leverages.
- Make sure that the best currency pairs are offered by them.
- Since the forex trading is done 24 hours a day, the broker must enable customer support.
- A right platform is also essential for trading and one must be choosy with the broker in selecting the platform.
Becoming a Good Forex Trader:
Forex trading can be learnt from any source. Many online platforms are also providing good and useful information so that one can become a good forex trader and make profits. To become a good forex trader,
- Having a sufficient amount of capital in the account is essential to have a good start with the trading so that one can even survive losses if any.
- One can make use of a demo account before starting with the real trade. But don’t overtrade with it.
- One must have proper trading plan and adhere to it.
- Assess the risks while opening the forex account itself.
- Never trade to compensate for the losses that you have already got and this may further ruin your position in the market.
Advantages of forex trading:
- As this market is liquid, one can easily make profits.
- Trading is flexible. One can enter or exit the market whenever they want.
- Can focus on fewer currency pairs instead of getting lost in huge stocks.
- Can trade anywhere in the world.
- There will be lower transaction costs and commission free trading with many retail market makers.
- The forex market is so huge and has so many participants such that no single entity can corner the market at any time possible.
- This market offers low barriers for making an entry because the brokers also offer “mini” and “micro” trading accounts.
- Technological advancements that are dynamic in a trading also offer a good platform for traders.
Risks and challenges:
As forex is vast market, there is high volatility. While high volatility can be good sometimes, this high volatility combined with high leverage may result in substantial losses. This loss might also exceed the deposits. One must also keep in mind the interest risks and transaction risks. So, one must carefully consider forex trading and seek an expert advic