So, you have decided to take your destiny into your own hands and craft a better financial future for yourself. Great! Of the many options available in the fiscal market, you could consider trading Forex. You just have to follow this beginner’s guide.
What is Forex trading?
I’m sure those of you who have travelled abroad are familiar with currency exchange. Each country has its own currency which is legal tender in that country. In order to make any financial transaction in that country you need the local currency. If you are from Japan and you travel to the US, you need to exchange your Yen to US dollars, which you can then use in shops, restaurants, and other places while in the US.
As the name suggests, Forex is culled from Foreign Exchange or currencies of different countries. This is currently the most popular form of trading and involves buying and selling of foreign currencies, either as a trading option or for travel and tourism.
With the shrinking of the globe and increase of international trade, every country has to use currencies of all the countries they trade with. This is a very fluid market and the value of currencies may fluctuate depending on demand and supply. Economic stability and strength, political stability, interest rates, popularity as a tourism destination, trading opportunities – all these determine the rate of exchange. Trading is done by the interbank market, which is just another term for individual banks trading with each other. Banks buy and sell different currencies and depending on the demand and supply position, an exchange rate is arrived upon for each currency. Three major types of fixing exchange rates are:
- The Dollar Connect – where a country may adopt another countries currency as its own, usually the US Dollar.
- Pegged Rate – where a currency is pegged to the currency of one or more currencies at a fixed rate.
- Managed Floating Rate – where a currency’s exchange rate is determined by the ups and downs in the market, but where the government or Central banks of the country may intervene to stabilize it.
Traders find the Forex a fruitful market to trade in. Buying a currency that is on the rise in value makes good profit. Sometimes, situations in a country may cause its currency to strengthen and hence a lot of speculative purchase may take place.
How do you go about Forex trading?
All you need is an internet connection, and an understanding of the Forex market. You can directly access foreign exchange markets through banks or by trading with iforex or similar facilitators.
You could trade on the Spot market, Futures market or the Forwards market. The Spot market is the most dynamic and is a natural pull and push arena where currency exchange rates depend on the market forces. You give ‘x’ amount of one currency and receive ‘y’ amount of another currency at a fixed rate. The deal culminates in a cash payment. Futures and forwards market are used by large companies who do international trade and want to reduce the chance of huge fluctuations at the time they have to make payments. So they fix a rate for the future and irrespective of the exchange rate at the time of transaction, the fixed rate applies. Many individual investors start their foray in the Forex market by trading with GWFX Global , which gives them support and know-how along with initial handholding.
Unlike the equity or share market where one has to choose between a bewildering range of stocks, the forex market is far simpler and one only has the option of currencies of a few nations, with the most popular being the US Dollar and the Euro. This is also a highly liquid market with very low margins and possibility of very high leverage. This means that for a very low initial investment, you could trade in huge amounts and up your chances of making a killing. It is open 24 hours a day and is a less volatile market than the equity market. Of course, as in all trading options, one has to be aware of market risks.