What is Forex?
What is Forex? Forex, or the Foreign exchange is one of the biggest financial markets across the globe that deals with real-time exchange of currencies between the various countries, otherwise called Forex trading. This exchange currency market has a huge volume of buyers and sellers than any other contemporary market. The USP of this market is the convenience, high liquidity, good prospects of trading and extremely high levels of leverage. Keep reading for a quick insight on what is Forex and how to trade it.
Why Trade Forex?
There are several reasons why you should trade forex. Some of them are listed below.
Low Commission Trading
This is probably the most remarkable reason why one should go for the Forex trading solutions. This trading will be free from the hefty commissions that you may have to pay otherwise. Most of the Forex broker agents charge absolutely little or zero fees for transaction as their charge is compensated with the help of their bid. The chances of paying a hefty sum, is relatively less for forex trading. However, this too may change with the changing market patterns.
The unique selling point (USP) of Forex trading is the high leverage it comes with. As this trading option starts with the minimum ratio i.e, 100:1, the Forex trading markets will offer huge amounts of leverage to the Forex Traders. This means that bulk profits can be produced by investing smaller levels of deposits. Now, even though huge leverage turns out to be one major advantage of attracting the traders to the markets, it can also turn out to be one of the major difficulties for them. With huge amounts of leverage, there is also a relatively higher scope of danger. This is caused due to the high stakes they carry along with them. The high stakes can be pretty much risky, thereby ending up with margin calls.
Market available for 24 hours a day
Forex trading does not come with an opening or closing bell. You can enter and exit the market according to your discretion. However, even though this is one of the most lucrative options, it can also be one of the toughest jobs ever. This is because, with Forex trading, the trader has to constantly keep a track of the Forex Market throughout the day. This can be a tedious job and requires real patience on the part of the trader.
Who Trades Forex?
There are several players in the forex industry. Some of them are listed below.
Banks – The maximum volume of forex currency is traded via the interbank markets. This is exactly where most of the bank, irrespective of their size conducts trade with each other through various electronic networks. Usually, banks facilitate the forex transactions by conducting trade speculation from their individual trading desks.
Central banks – Most of the central banks too end up being the leading players of the forex industry. The interest rate policies and open market operations of the central banks play a vital role in influencing forex currencies.
Investment managers – Investment managers come right after banks and central banks in the list of leading forex traders. These managers influence forex trends by trading currencies for large accounts like pension funds.
Companies – Companies, particularly the ones who focus on export and import, conduct forex transactions in order to pay for the goods and services.
Individual investors – The volume of forex trades conducted by the individual investors is relatively low when compared to banks, financial institutions and corporations. However, individual investors too shape the course of forex trading. Usually, the retail investors conduct currency trades based on a combination of several fundamentals (parity of the interest rates, rates of inflation, expectations from the monetary policy and so on) along with technical factors (technical determinants, patterns of price, support resistance etc).
When To Trade Forex?
When it comes to forex trading, most people are comfortable in conducting the trading sessions during the Asian trading hours. The pairs of European currency like EUR/USD too can come up with some really viable results. Most forex traders, however, feel that the best time to trade forex is between 2PM to 6AM (Eastern Time, New York). This is around 7PM to 11AM in the UK.
How To Trade Forex?
There are usually three ways in which banks, corporations and individual traders, trade forex. They are namely; spot market trading, forward market trading and future market trading. In the spot market trading the currencies for the trade are purchased and sold as per the current price of trading. This price, on the other hand is influenced by various factors like demand, supply, interest rates, current economic state of affairs, political situation and so on. The final deal is known as a spot deal. It is more of a bilateral transaction where an individual party agrees to deliver a pre-decided currency amount to the corresponding party. They then receive a currency at the decided exchange rate. The settlement is made in cash after the position is closed.
The forwards and the future markets, however, do not conduct trades with real currencies. They rather deal in a set of contracts that is meant to represent their claim to a certain type of currency, its particular price/unit and final date for the settlement.
In forwards trading, the contracts are usually bought and then sold over the counter between two parties. It is these parties who determine and figure out the proper terms of agreement among themselves.
In future market trading, the future contracts are purchased and sold in accordance to a specific size and date of settlement. This date and size is set on the public market of commodities like the Chicago Mercantile Exchange. In the United States, the futures market is regulated by the National Futures Association. The contracts here come with a specific set of details which includes the total number of units that are being traded, the estimated date of delivery, the final date of settlement and the minimum increments in the price. These dates and details cannot be changed or customized. The entire process of exchange appears like a counterpart of the trader, thereby providing them the settlement and the clearance at the same time.
What is Forex? Read further our in-depth articles of Forex.