Forex is a portmanteau derived from the words “foreign currency” and “exchange.” Foreign currency trading has enabled globalization and aided international trade.
The Forex market has a decentralized structure to trade currency. Due to the lack of a central location, Forex market trading is active twenty-four hours a day and five days a week. It involves worldwide parties trading currency over-the-counter (OTC). These parties include traders, commercial and central banks, and numerous institutions of investors.
Simultaneous sales and purchases of currency occur in the Forex market. The daily Forex market turnover is over 6.6 trillion US dollars, according to the BIS statement for the years following 2019.
Currently, there are three main types of Forex markets in play. These are:
- Market of Future
In this market, traders agree to sell or purchase a fixed amount of a currency at a later date in the future, at a fixed exchange rate.
2. Spot Market
The transaction of currency pairs happens here. In this prime Forex market, the forces of demand and supply determine an exchange rate based on real-time.
In this market, a trader partners with other trader(s) to sell a currency up to a certain amount. The trading partners agree on a locked exchange rate. However, this is an OTC market called an “on-standardized agreement.”
Forex trading involves selling one currency to purchase another. This happens via currency pairing. One currency in the pair is a base currency, while the other is a quote currency. The leading and most liquid currency pair in the entire Forex market is the US Dollar/ Euro. Furthermore, the Great Britain Pound/ US Dollar accounts for the second-largest trade volume on Forex.
Importance and Reasons of Forex
For instance, when traveling to another country, you have to make transactions for food, entertainment, accommodation, and other things, via the respective country’s official currency. Forex allows you to convert home currency into the currency of the country you’re visiting.
Various other aims exist, but a major goal of Forex traders is to generate profits through currency trading. The avenues of income, investment, profits are open to any potential investors, companies, as well as individual and institutional investors. But this is only if they can analyze the Forex market’s trends and utilize effective strategies.
Few Factors that Influence the Forex Market
Similar to any market, the free forces of demand and supply operate in Forex as well. The dynamics of political and economic changes influence the exchange rate of various currencies and, consequently, their pairs. Monetary policies of central and commercial banks play a significant role as well. In the Forex market, leading economies (e.g., USA, UK, European Union, Japan, etc.) are major influencers of these currencies.
Forex Trading- Potential Benefits
World’s largest and extremely liquid financial market grants some benefits to the Forex traders. Here are a few:
- Twenty-four hours of trading a day is an extensive time to adjust and implement changes to your trading plans.
- You can trade for the long-term or the short-term.
- You can optimize trading in accordance with any fundamental factors’ (political, economic news, monetary policies, etc.) influences.
- Leverage is the plus point of Forex trading. If you want to open a position in trade, you can pay a fraction of the full value.
- Spreads (the difference between the bid and ask price of a currency) are narrow due to high-liquidity. This also allows low trading costs.
Forex Trading- Potential Risks
The potential risks when trading on Forex markets are also noteworthy. Here are a few briefly:
- The concept of leverage entails that the potential profits or losses both magnify when trading. As you pay a fraction of the full value of the trading position, the leverage ratio comes accordingly. High leverage means a high percentage of gains. However, it can also cause heavy losses. This might even indebt you to your broker or the source of your borrowing.
- Regulations affect the state of your accounts. Your trading accounts should hold a specific minimum amount to continue trading. Market trends might affect your trading accounts, forcing the trading platform to close them.
Forex trading is part of international trades, affecting many economic and political aspects of various countries. You can choose to trade only for certain currency pairs. Nevertheless, you can opt for a wide variety of currency pairs at once.
Forex market gives you firm knowledge and update of the global financial trends. Besides, it also generates immense profits for you as it has done before.