WHAT IS FOREX

The foreign exchange or ‘Forex Market’ is the world’s largest financial market. It is a non-stop cash market where currencies of nations are traded off-exchange through brokers.

It is estimated that, on average, $3.6 trillion is traded each day in the world Forex markets. The vast majority of Forex trading does not occur on any one centralized or organized exchange but through brokers on the interbank currency market. The interbank currency market is a twenty four hour market that follows the sun around the world. Opening in Australia and closing in the U.S. Whilst the market exists for organizations with exchange risk, speculators also participate in the Forex markets in an effort to profit from their expectations regarding shifts in exchange rates.

Forex simply is a short form of Foreign exchange. It is also called as the Currency market or the over-the-counter (OTC) market. It trades over $5 trillion every day. It is a process of changing one currency to another currency. This can be done for many purposes, a few of them being commerce, trading or even tourism. Forex is a simple process of buying and selling currencies to gain profit. It is an old age practice since the time nations began minting currencies, but modern day Forex is a modern invention of mankind.

The fluctuating values of individual currencies have led to this international market of foreign exchange services and trading. Currencies are an integral part of people around the globe, irrespective of their realization or importance of currencies. This market decides the foreign exchange rates for each currency. The forex market is a globally prominent forum for the exchange of currencies belonging to different nations. Currencies are to be exchanged for foreign trade and business. Since currencies are always traded in pairs, the foreign exchange market sets the currencies relative value and not its absolute value. Usually, Financial organizations, corporations, and investment banks conduct the majority of trading in the foreign exchange market. They offer to do it on behalf of their clients. But trading is just not restricted to these big giants; it can also be done by individuals via investors.

The trading of currency is conducted electronically OVER-THE-COUNTER (OTC). This means that all the transactions are done via a network that is between traders all over the globe. This market is open to all. It implies that the centralized exchange is not done on one and one basis, which is an added advantage in the foreign exchange market. This market is open for 24 hours a day and five and a half days a week and currencies are traded worldwide in the major financial centres. This covers almost every time zone around the globe. This simply means that when trading in Paris ends, the market for foreign exchange begins in New York. As such the market remains active at all times of the day, with frequently changing price quotes for currencies. The price of a particular currency is directly proportional to the market’s opinion on the current and future economic status of that particular country.

Listed below are a few advantages of trading in forex

Trading in forex has its advantages which lead people to prefer it over other, Listed below are some of the major ones,

High liquidity

With high liquidity, one can never be stuck in a trade. Since the forex market is large it is extremely liquid. This eases the process of buying and selling in the market.

Trade anytime anywhere

With 24 hours trading option one can trade anywhere at any time. Technological advancements are the reason for this advantage of the forex.

No fixed lot size: In forex one can determine their lot or position size. There is no interference of exchanges in determining the lot size.

Cost advantage

⦁ Low transaction cost: Even though the transaction cost depends on the leverage the bid/ask spread in Forex under normal market condition is very less (0.1%) whereas in the case of the large transactions is very low.
⦁ Zero commissions: It is a complete no to clearing fees, exchange fees, brokerage fees or government fees in forex. Spread is mostly used as the compensation for forex brokers.

What is traded in Forex?

The simple answer to this question is money or cash. As there is no materialistic item involved this type of trading can be a little confusing for traders at first. Forex trading is basically like buying stocks of a company. For example, when you buy a US Dollar is very much like buying a share in the US economy. The price of that currency currently will implicate the direct reflection of markets’ opinions on the current and future economic conditions of that particular country.

Buying and selling of currency pairs

There are two things under this: the buying rate and the selling rate. The buying rate is the rate at which the money dealers buy a particular foreign currency and the selling rate is the rate at which they wish to sell that particular currency. So the difference between these rates of buying and then selling the currencies is their profit. If the currency increases in value the trader may most probably close the trade with a gain. But in case a particular currency loses its value then the trader will surely incur a loss.

Forex market size and liquidity

The foreign exchange market is considered to be the biggest financial market across the globe, although it does not hold any physical exchange or does not even hold any particular physical location. The fact that this market has no boundaries and is operated as a virtual market place makes it the largest market in the world. Foreign exchange being an international market is yet to hold any central market place for trading. As the market of trade, finance and commerce have reached a worldwide connection; due to this boom in the latter industries, the Forex market has now become the biggest and most liquid asset in the world. Forex is considered to be the most liquid market around the globe with the largest liquidity. Liquidity is simply defined as liquid assets or the free flow of assets or cash that is easily available. It can also be described as a mass number or a high number of activities in a market or availability of assets to a corporation or a company. Liquidity in terms of foreign exchange market means “how easily an asset can be bought and sold quickly at very stable prices”.

Some certain institutions or retailers act as forex liquidity providers in the foreign exchange market and are called market makers. And the same liquidity providers in the foreign markets are known as the Tier 1 liquidity provider. There is always a rise in liquidity when trading activities are high. This also happens when there arises a high supply and demand for an asset, ending up in finding buyers and sellers easily. The forex market has an advantage to other markets across the globe as it allows traders to enter and exit the market instantaneously. Due to its large size and depth forex market makes itself an ideal market for traders and it’s high liquidity makes it easier for traders to buy and sell currencies without any delay.

Different ways to trade forex

There are five main types of trading available to a proficient or an experienced trader. They are scalping, day trading, momentum trading, swing trading, and position trading. At least one of the above types is to be mastered, but it is also important to be well versed with the rest. Foreign exchange is a low-risk trading market that offers several ways to invest or speculate in currencies to its traders. Among the many, the most popular ones being spot forex, currency futures, currency options, and currency exchange-traded funds (ETFs).

Spot Forex:

As the name specifies, in the spot market/spot forex the trading is done immediately or on the spot which depends on the market price. This type of account can be opened with very less capital of $50 and it makes it easy to participate in the market with a small amount.

Currency Futures:

Just like the spot forex, the name of futures specifies what it does. Yes!! Futures are contracts that allow buying or selling a specific or certain asset on a future date. The future market is well regulated and is transparent. All the data such as price and transaction information are available readily in currency futures.

Currency Options:

Options provide the right or option to the buyer, but it does not provide the obligation to buy or sell an asset on a specific price like currency futures which allows selling on a specific price on expiry.

Currency Exchange Traded Funds:

Exchange traded funds offer influence to single or basket of currencies. The financial institution which buys and holds currencies in a fund creates and manages the Exchange Traded funds. Those institutions then provide a public offering of the shares of the fund which allows buying and trading the shares. The time duration is limited in the Currency Exchange traded fund market. It is not operational for 24 hours of the day and also has charges like trading costs and commissions.