Forex is a wallet of foreign currency and exchange. The process of changing one currency into another form for various reasons like trading, tourism, and commerce is called Foreign exchange. According to the recent report released by the Bank for International Settlements (a global bank for all the national central banks), the daily forex trading volume was more than $5.1 trillion on average.
What do you mean by the Forex market?
The foreign exchange market is the place where you trade currencies. Currencies are crucial for people all around the world, whether they understand this or not because to conduct any foreign trade or business, you need to exchange currencies. For example, if you are living in the US and wanted to buy cheese from France, either the company from which you are buying cheese, or you individually have to pay the French in Euros for the cheese. This process in which the US importer has to exchange USD's equivalent value into Euros is forex trading. The same happens wherever you travel. Every place you travel, you must exchange your country’s money for an equivalent value of that country's money. You can use only the locally accepted currency.
One special aspect of the International market is that you
do not have any central marketplace for foreign exchange. Currency trading is
made electronically, i.e., Over the counter (OTC). This means all transactions
occur through computer networks between traders all around the world rather
than one centralized exchange. The market is available 24 hours a day, five and
a half days a week. Currency trading happens in major financial worldwide in
centers like New York, Frankfurt, Singapore, London, Tokyo, Paris, Sydney,
Zurich, Hong Kong across all time zones. So when the trading for the day ends
in the US, the forex market begins anew in Hong Kong and Tokyo. In this way,
the forex market remains extremely active at any time of the day, and the price
quotes keep changing constantly.
Why do we trade currencies?
It is difficult for individual investors to handle
currency trading before the Internet. Since forex trading required a lot of
capital amount most of the currency traders were hedge
funds, large multinational corporations, or high net worth individuals. In
recent days with the help of the internet, individual traders have emerged. The
retails markets aim to provide easy access to the foreign exchange market. This
happens either through the banks themselves or through secondary markets made
by the brokers. Individual traders capable of controlling a large trade with a
small account balance are offered very high leverage by most online dealers or
brokers.
What are the risks in Forex Trading?
There is always risk associated with trading currencies, and the process is complex. Since the interbank market does not have a stable degree of regulation and the forex instrument keeps changing without a particular standard. In most parts of the world, forex marketing is almost completely unregulated.
The interbank market comprises banks trading with each
other all over the world. Even the bank has to determine and accept credit risk
and sovereign risk. To keep them as safe as possible, the banks have
established internal processes. Industry imposed regulations are made for
strengthening the protection of each participating bank. The market pricing
mechanism depends on demand and supply as the forex market is made up of each
participating bank that provides bids and offers for a particular currency. Due
to the large trade flow that prevails within the system, it is difficult for
fraudulent traders to influence a currency's price. Thereby the systems help to
create transparency in the market for investors who have access to interbank
dealing. Most of the small retail traders trade with semi-unregulated or small
forex brokers or dealers. This can sometimes require prices and even initiate
trade among their customers. Depending on the industry and government in which
the forex dealer is located, certain regulations may be imposed. These are
completely inconsistent around the globe. Retail investors need to spend time
investigating a forex dealer about the regulation in the US or UK or a country
with oversight and lax rules. It is also crucial to analyze what kind of
protection is maintained for the accounts during the time of market crisis or
if the dealer becomes insolvent.
What are the pros and challenges faced in Forex Marketing?
Pros
●
The forex market is the largest
trading market in terms of daily trading volume in the world and hence offers
the most liquidity.
●
It is easy to enter and exit a
position in any of the major currencies in a fraction of seconds for a small
spread in major marketing conditions.
●
The major forex trading centers
are Hing Long, Frankfurt, New York, Paris, Sydney, Singapore, London, and
Tokyo.
●
The forex market is open for trade
24 hours a day and five days a week. The trade begins in Australia and ends in
New York every day.
Challenges
●
With little money, traders can
control large positions as brokers, banks and dealers allow a high amount of
leverage.
●
A trader needs to understand the
importance of leverage and its risk on an account and use it wisely.
●
Extremely high leverages have led
to the unexpected insolvent of many dealers.
●
It is important to understand the
indicators and economic fundamentals of productivity trade currencies.
●
A currency trader must understand
various countries' economics and the interconnected concept to grasp the
fundamentals that drive currency values.
Conclusion
For traders particularly with limited funds, swing trading or day trading in smaller amounts is easier in this Forex market when compared with another market. For traders with larger funds or longer-term horizon, carry trade or long term fundamentals-based trading is profitable. It is important to understand the macroeconomic fundamentals that drive currency values. Having experience in the market's technical analysis will help newbie traders have profitable trading in the forex market.
Ross is known as the Pambansang Blogger ng Pilipinas - An Information and Communication Technology (ICT) Professional by profession and a Social Media Evangelist by heart.
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