Forex Trading - The continuous & nonstop trading market in the world
Table of Contents
When you go to a new country for the first time, as a tourist, you're advised to take money in the same currency used in that particular country. However, because your currency is invalid in that country, one must exchange it for theirs to buy goods and services. For this, one must visit any authorized merchant dealing with foreign currency exchange that is also known as Forex Exchange or Foreign Exchange. This Forex or Foreign exchange takes place over-the-counter (OTC) within a few minutes.
There can be large variations in the currency value, varying from country to country. For example, 1 United States Dollar is valued at 82 Indian Rupees. However, US goods and services will cost numerically less than in India. Still, this large value difference can be beneficial because these values can rise and fall depending on the economy of the respective countries. The rise and fall of the currency value can be used for profit in the market, known as Forex Trading that can be done in Forex Market.
Forex stands for Foreign Exchange or Forex Market, or Forex Exchange. It simply means Trading or exchange of one currency for another. It is a necessary exchange process that any tourist performs to use money in a foreign country. Tourist needs to sell their domestic currency notes in exchange for foreign currencies. The foreign exchange trading business is quite large worldwide. The daily forex trading volume reached $6.6 trillion in the same year, according to reports from the worldwide bank for national central banks known as the Bank for International Settlements. Directly or indirectly, all of us are involved in Forex trading. For instance, if a person buys a product imported from a foreign country, its retailer purchases it by exchanging their domestic currency to buy that product later bought by that person in their domestic currency. Therefore, everyone deals with Forex trading one way or the other.
One common thing between any type of Forex Trading is that they all have the same function of buying one currency while selling the other. Forex trading and transactions have always been made with the help of a forex broker who has all the knowledge and resources to exchange the currency. Still, as society has developed and educated itself about the forex market through the rise of online Trading, anyone can utilize forex price movements using different techniques like CFD trading.
An investor or buyer (in the event of a foreign exchange deal) and a seller or foreign exchange broker enter into a contract known as a CFD. This contract verifies that the buyer of a currency must pay the seller the difference (or increment) between the currency's current value and its value when the contract is issued. Therefore, the seller profits in the rise of currency value, and the buyer enjoys the new currency which has been exchanged and also its profits. CFDs help brokers and investors profit from the currency's price movement without owning any of the assets or the currency itself. The CFD contract does find the asset's original value essential, but it only provides the benefit of the difference between the new price and the old price. The trade is entered at a lower price than its exit.
CFDs are leveraged products in which one attempts to forecast and analyze whether the market will increase in value or decrease in value without owning any assets, unlike non-leveraged products.
Although leveraged products help a trader to magnify their profits, they can also bring heavy losses if the market does not perform well.
There are two ways of trading currencies-
Firstly, a person can earn from the difference between the interest rate of two currencies, and secondly, they can profit from changes in the exchange rate.
An investor can profit from the differential interest rates in two different currencies by buying the currency with the higher interest rate and exchanging it with the currency with the lower interest rate. Before the financial crisis of 2008, for instance, it was typical in the FX market to swap the Japanese yen (JPY) and buy British pounds (GBP) because of the significant interest rate difference between the two currencies. A carry trade is another name for this tactic.
Forex trading is different from the stock market exchange of shares or commodities because forex trading does not involve exchanges of shares from one shareholder to another, but it is simply a direct sale and purchase between two parties in an OTC (over-the-counter)) market. This does not mean that trading centers do not bound FX trading. The foreign exchange market is governed by a worldwide network of banks dispersed across four significant forex trading hubs in various time zones: London, New York, Sydney, and Tokyo. The different time zones make FX trading unique because, due to the lack of one central location, anyone can trade forex anytime, 24 hours a day.
There are 3 types of forex market which are as follows-
7.1 Spot forex market: It is the quickest way of trading where the exchange of a currency pair like USD/GBP takes place simultaneously at the same point by settling the trade 'on the spot' or by taking as less time as possible. This type of forex trading is popular among tourists.
7.2 A forward forex market is a contract between two parties that will buy or sell a decided amount of currency for a specified price, which will take place at a set date in the future. This market largely depends upon the rise and fall of currency values in the future.
7.3 Future forex market: It is also a contract that agrees to buy or sell a decided amount of currency for a set price and date in the future. But it is different from the forward forex market because futures contracts are legally binding.
Because the forex market is based on the rises and falls of currencies from all over the world, it is challenging to forecast exchange rates because so many variables influence price changes. But, like most financial markets, the forex market also depends on the forces of supply and demand. Consequently, it is crucial to comprehend the causes of market price variations.
8.1- Role of Central banks
The currency supply is controlled by central banks, who can announce new regulations in the monetary system. This can bring a significant change in the currency's price. Each country's central bank is responsible for the growth rate of its economy and currency. For example, a central bank may impose Quantitative easing, which helps the government use more money in its economy, which eventually causes its currency's price to fall.
8.2- Favourable news of a country
Investors seek the best opportunities to invest in businesses with good prospects and a strong outlook. Therefore, if a certain country or a region has favorable news which showcases the development in any business sector, it attracts and promotes investors and commercial banks, which will eventually increase the demand for that region's currency as it allows new businesses to operate from different markets in different regions.
The supply and demand of the services increase the price of the currency. Whereas unfavorable news can cause investors to pull away from that region, decreasing the investment potential and lowering the currency's price. For example, Hong Kong and other Asian countries are facing a major setback in their tourism business after it was hit by Covid-19. The city is facing an increase in outbound travel; therefore, the region's demand for services and goods is declining.
8.3- Public reaction to the news
Public reaction to the news plays an important role in determining currency prices. Investors in forex trading try to understand and analyze the market conditions through countries' economic changes. They trade according to the economic news of a country which convinces them and others to exchange money which will either increase or decrease the demand for that currency. This is why currencies play an important part by reflecting the country's economic health. The forex trade blooms in a stable economic environment.
8.4- Economic data
Economic data is important to understand the price movements of currencies. Firstly, it tells us how a region's economy is performing, and secondly, it helps the investors predict the movements and measures of the central bank.
For example, that inflation in the United States has risen more than 2% than the US banks have anticipated. The US bank's first step in fighting inflation is increasing American interest rates; therefore, the currency traders will wish to buy US dollars because they know that the currency's rates can rise due to inflation.
8.5- Credit ratings
Investors' main concern is maximizing the return or profit while minimizing their risks. Therefore, apart from interest rates and economic data, they also analyze a particular region's credit ratings when deciding on their investment plans.
A country's credit rating is meant to measure its ability to repay its debts timely. For investment purposes, a nation with a high credit rating is more secure than one with a low credit rating. This also affects the forex market when a country with an improved credit rating increases its currency's price. Conversely, the currency's price will also decrease when the credit rating decreases in unfavorable circumstances.
Forex is the quickest way of trading. It requires a few simple steps and procedures and anyone can successfully trade currencies for their profits. If a person wishes to start forex trading, they can take the following steps:
9.1. Stable Internet Server
As we know, forex trading can be done from anywhere and at any time. To trade forex, an investor must have access to a stable Internet connection which can connect him to an online broker. Forex trading platforms run on any smartphone, tablet or computer because it does not have a particular market like the stock market. If a person trading currencies lose an internet connection while trading, they can face great unwanted losses if the market rolls over.
9.2. Find a Forex Broker
A person can either contact a forex broker in person or they can open an account with an online forex broker irrespective of the place they live. A forex broker is a financial services company which helps traders to find a forex platform for buying and selling foreign currencies. One can find any authorised forex broker who meets their requirements as a trader and they can be its client. A forex broker keeps your money separate from theirs and works according to a regulated jurisdiction which comes under a reputable regulator, for example in India all forex trading is overseen by SEBI (Securities and exchange board of India) and RBI (Reserves Bank of India). Apart from SEBI, other organizations are also involved in deciding the rules and regulations of forex trading in India. All the necessary trading guidelines and protocols have been established under the Foreign Exchange Management Act.
While looking out for forex brokers, one must remember that they can only trade through three stock exchanges. The United stock exchange (USE), MCX-SX and the National Stock Exchange (NSE).
9.2.1 India’s top forex brokers are-
These offer trading tools and guidance and other global indices and commodities such as gold, silver and oil.
After selecting a broker, anyone can deposit funds into a trading account. Most online forex brokers provide several ways to fund an account which include bank transfers, debit card payments or transfers from electronic payment providers like Paytm or GooglePay.
9.4. Acquire a Forex Trading Platform
A forex trading platform is needed to be accessible to an investor which is supported by their broker. Most forex brokers either offer a proprietary trading platform or support a popular 3rd-party platform like MetaTrader4 and 5 (MT4/5) from MetaQuotes.com or NinjaTrader.
9.5. Start Trading
After finishing all of the above steps, an investor has a funded forex account and he/she is ready to trade. One can also open a demo account which is funded with virtual money to test and learn the broker’s forex platforms and services before stepping into the market with their actual funds. These are called Demo accounts which are also helpful for testing trading strategies and practising trading without risking any funds.
Because it is conducted on the currency market, which is available for business 24 hours a day and seven days a week, forex trading is a nonstop trading enterprise. The currencies are used by banks, businesses, investment firms, hedge funds, and retail traders. As a result, the forex market is the world's largest and most liquid financial market. It has an average global daily turnover of more than US$6.5 trillion, which was $5 trillion just a few years ago; this shows how steadily the market is expanding.
One of the best things about the forex market is that there is no established or permanent marketplace or central exchange where these swaps occur. Instead, currency trading is performed electronically through computer networks and the Internet. This is also known as an over-the-counter (OTC) market. Currency trading was very difficult for private investors before the Internet. Due to the high capital requirements of forex trading, the forex market was mostly controlled by major multinational organizations, hedge funds, or high-net-worth individuals (HNWIs). When Internet trading started, a retail market was established that focused on individual private traders, providing easy access to foreign exchange markets by connecting banks or brokers, creating a secondary market. Individual traders can control a huge trade with a small account balance because of the significant leverage offered by most online brokers or dealers.
Frequently Asked Questions
Forex trading can be complex for beginners and may not be suitable for everyone. Forex trading depends on a person’s financial condition, goals, and their investing experiences and understanding of the market. Beginners should choose their brokers cautiously, because many forex traders can lose money quickly.
The forex market, unlike other exchange-driven markets, has a unique feature that many market makers use to entice traders. They promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions.
United Arab Emirates, Bahamas, Qatar, Kuwait, Monaco, Oman, Panama do not have any tax on forex.