The term Forex is the amalgamation of two terms – FOReign + Exchange = Forex. It is trading in a global market for sale and purchase of currencies. It is alike stock trading, which allows you to sell and purchase shares of a particular company. In Forex, you don’t get the possession of the money; you earn profits from the constantly changing currency value on the basis of their exchange prices instead. The Forex market determines the floating exchange rates’ value.
What stabilizes Volatility in the Forex Market?
More and more countries are opting for flexible rates of exchange that allow gradual and natural movements. The drawback of fixed rates of exchange is that they let pressure develop. For instance, when market tries to overcome that, fluctuations are caused by the rate of exchange. This stands true for the emergent market currencies, as it makes them a key player in the global economy. The “BRIC” nations – Brazil, Russia, India, and China’ till 2013 kept Forex traders involved in their respective currencies.
Why is Forex Important?
The Forex market is the spine of the global trade and investing. So, it becomes very significant to keep the exports and imports going on. It activates the access to the resources that creates an additional need for the goods and services. If there is no ability to trade in various currencies, the global economy would have to face consequences due to limited prospects. Investors seeking international diversification advantages are supposed to sell and purchase foreign currencies and trade foreign securities and assets.
The currencies are sold and purchased bilaterally by the electronic means. Forex cements the bond of global network, as the sellers and buyers trade currencies globally.
The Features of Forex Trading
The Forex market, being the largest financial marketplace, provides maximum liquidity to the traders. In the Forex market, daily trading usually exceeds 4 Trillion US Dollars on a daily basis. In addition to that, more than 1.5 Trillion of that amount is traded in the form of spot-trading. The Forex spot trading comprises the ‘Contract To Trade’ that enables a particular amount of currency pair that is derived from a market making advertised selling or buying price i.e. the spot rate. The traders should be aware that high volatility signifies that the market has higher risk potential.
Margin-Based Trading and its Benefits
Most of the OTC Forex trading brokers propose Margin-Based accounts to the traders because it is different from accounts that are credit-based. In order to trade using a Margin-Based account, firstly, you must open an account with your agent/ broker, and then the account is funded by depositing the funds in that account. When you have added money to your Margin-Based account, you can get involved in the trading activity of your choice as long as your account has an adequate margin in it.
The leverage adds the possibility to make trading in larger positions. Otherwise, it would only be possible on the basis of the actual balance in your account. The leverage makes it possible to provide great potential for returns.
With the pros, come the cons. The flip side of the trading lies in greater potential, as you can incur losses rapidly. Getting insurance against your investment is highly recommended and is certainly a wise idea.
Forex Trading and Business Timings
The Forex trading functions 24 hours of the day, for the five days of the week. The highest liquidity is a result of overlapping of different time zones during the hours of operations.
Also, it is crucial for traders to understand the relationship between market functioning and market liquidity, as it will help them to make their trading game strong.
Forex Trading and its Cost
With major Forex traders, the trading cost is the spread, which is the remainder of the price asked and the bidding price. In the Forex trading market, the spread has a tendency to be very less as compared to the spreads of the various securities like stocks. That makes OTC Forex trade as the highly cost-effective instrument of investment trade.
Potential Profit vs. Market Direction
A short sale is the sale of a currency pair difference even before you buy it. When you trade in the Forex trade market, it is easy to make entry into A short-sale. If you want to earn the profit on A short-sale, you have to buy the derivative currency for a lesser amount than you got it when you sold it. Whether you make the profit or you make the loss, it is determined only by the difference. If you are able to make engaging in A short-sale, it suggests that there is a possibility for you to make profit, irrespective of the ongoing market trends.
When the prices are hiking, you can make the profit when you buy a pair of currency derivative and later sell it for a higher price and earn your profit. When the prices are slashing, there is still a scope of making the profit. By selling your derivative currency pair and later buying it for a lesser price.