- Fundamentals of Forex trading
- Who trade Forex and Why?
- Advantages of Forex Trading
Fundamentals of Forex trading
Forex, also known as foreign exchange or FX trading, is the conversion of one currency into another. FOR goes with foreign and EX is for exchange. It is one of the most actively traded markets in the world, with an average daily trading volume of $5 trillion.
Forex, or foreign exchange is a network of buyers and sellers of currency. These parties transfer currency between each other at an agreed price. Through Forex trading individuals, companies and central banks convert one currency into another. If you have ever travelled abroad and have converted your currency as per country of visit, then you have made forex.
The forex market is run by a global players which are network of banks, spread across four major forex trading centres in different time zones: London, New York, Sydney and Tokyo. Because there is no central location, you can trade forex 24 hours a day.
Who trade Forex and Why?
Following are the market force which largely affect Forex market and are market movers. The key difference among these market participants is their level of capitalization and sophistication, where the elements of sophistication mainly include: money management techniques, technological level, research abilities and level of discipline.
Forex also works on supply and demand principle. Supply is controlled by central banks, who can announce measures that will have a significant effect on their currency’s price. If Central banks decides to inject more money into an economy It may cause its currency’s price to drop.
Role of central Banks :
Central banks don’t intervene in day to day basis in Forex market rather it takes big steps when they feel some steps are required to be taken for the benefit of the economy.
Like in January 15th, 2015, Swiss National Bank (SNB) suddenly announced that it would no longer hold the Swiss franc at a fixed exchange rate with the euro. After that one euro which was worth 1.2 Swiss francs at one point it had fallen to just 0.85 francs. A number of hedge funds across the world made big losses. The Swiss stock market collapsed.
Reason behind this step was that Swiss franc was considered as “safe haven” asset because of Swiss government policy . Investors liked Swiss franc but as investors flocked to the franc, they dramatically pushed up its value.
An expensive franc was unhealthy for Switzerland economy because if its dependence on selling things abroad: exports of goods and services are worth over 70% of GDP. To carb the franc’s value, the SNB created new francs and used them to buy euros.
The commercial banks account for by far the largest proportion of all trading of both a commercial and speculative nature and operate within what is known as the interbank market. This is essentially a market composed solely of commercial and investments which buy and sell currencies from each other.
There are hundreds of banks participating in the Forex network. Whether big or small scale, banks participate in the currency markets not only to offset their own foreign exchange risks and that of their clients, but also to increase the wealth of their stockholders.
Major banks such as Deutsche bank, UBS, and others such as Royal bank of Scotland, HSBC, Barclays, Merrill Lynch, JP Morgan Chase, and still others such as ABN Amro, Morgan Stanley, and so on, actively trade in the Forex market to provide liquidity to operations.
Commercial banks not only trade on their own behalf and for their customers, but also provide a channel through which all other participants must trade.
Big corporation and multinationals companies have their business need to receive or make payments for goods or services they may have rendered to engage in commercial or capital transactions that require them to either purchase or sell foreign currency.
These entities are so called “comercial traders” use financial markets to offset risk and hedge their operations.
Fund Managers, Hedge Funds
These are basically international and domestic money managers. They deal with hundreds of millions, as their pools of investment funds tend to be very large.
Fund managers invest on behalf of a range of clients including pension funds, individual investors, governments and even central banks.
Fund managers have obligations towards their investors to provide good return. The bottom line of the most aggressive hedge funds is to achieve absolute returns besides managing the total risk of the pooled capital.
These are the end traders like you and me who venture into forex market through Internet-based dealing platforms. This is really diversified pool of traders.
If you want to exchange one currency for another and make some profit, just like most individuals, you are unable to access the pricing available on the interbank market. You can’t just barge into Citigroup or Deutsche Bank and start throwing Euros and Yen around, unless you are a multinational or hedge fund with millions of Dollars. To participate in the Forex, you need a retail broker, where you can trade with much inferior amounts.
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Advantages of Forex Trading
Forex trading is quite popular career option especially for people with a financial background. Gives you freedom of being your own boss with the comforts of making money using your laptop/mobile. Following are key advantages of Forex trading.
No need to worry about whether you get appropriate price or not.
Under normal market conditions, you can instantaneously buy and sell with a click of a mouse as there will usually be someone in the market on the other side of your trade.
You are practically never “stuck” in a trade. You can automate things by setting your online trading platform to automatically close your position once your desired profit level has been reached.
Better Risk Management
can trade in small lot sizes. In spot forex trading, you determine your own lot, or position size. This allows retail traders to start from as small as $25.
There are no commissions in a real sense – most forex brokers make profits from the spreads between forex currencies. Hence, one does not have to worry about including separate brokerage charges, eliminating an overhead.
No time boundation
The forex markets run all day, enabling trades at one’s convenience, which is very advantageous to short-term traders who tend to take positions over short durations (say a few minutes to a few hours).
You can trade in any market session any time you want. This is awesome for those who want to trade on a part-time basis because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
Low transaction cost
The retail transaction cost is typically less than 0.1% under normal market conditions. For larger transactions it could be as low as 0.07%.
As per ig.com, The high liquidity in forex means that transactions can be completed quickly and easily, so the transaction costs – or spreads – are often very low. This creates opportunities for traders to speculate on price movements of just a few pips.
How Forex Market Moves UP and DOWN ?
Let’s consider one example : If there are More people buying one product (example : GOLD), which means more buyers for GOLD means “More Demand” => Price will Increase Higher (Gold Market moves up)
Forex Market works on 2 currencies combined together. Example : EUR/USD
If First Currency (EUR) becomes strong (More Buyers), then EUR/USD Market will Move UP.
If Second Currency (USD) becomes strong ( More buyers), then EUR/USD market will Move DOWN.
How is it possible to make profit in Forex trading at anytime under any situations ?
Let us assume a currency pair USD/INR.
USD = First Currency = Base Currency.
INR = Second currency = Counter Currency or Quote Currency.
If First currency is strong means market moves UP, in this situation place a buy order to make Profit. Now if second currency is strong means market will moves DOWN in this case place sell Order to make profit.