Now a days trading is something big decision in life as it deals with money investment in the market. Most of the people don’t know how to trade in market, online market or Forex trading. This article will tell you about Forex trading and how you can invest your money in the market and can deal with the currency as Forex trading is the market where people deal with currency or where currencies are traded. Forex trading is the big investment market because currencies are important to most people around the world. And currencies need to be exchanged in order to conduct foreign trade and business. Thus, it is the benefit for those who (Beginners as well as experienced) want to start their business in Forex trading.
- 1 What is Forex Trading or Forex Market ?
- 2 Forex Vs Stocks
- 3 How does Forex Trading Works ?
- 4 How to begin with Forex Trading ?
- 5 Forex as Hedge !
- 6 Forex as Speculation !
- 7 Top 5 Risks in Forex trading :-
- 8 Pros and Cons of Forex Trading!
- 9 Ways to approach Forex Market !
- 10 CONCLUSION
What is Forex Trading or Forex Market ?
Forex is a name for foreign exchange market and foreign exchange currency trading. Forex is the global market in the world as it is the market where traders exchange one country’s currency into another country’s currency for commerce or business. Exchange of foreign currency is necessary for trade and also for so many reasons for example Tourism, investment, business, or to purchase something from other country, it generally requires a currency of that particular country to do so. Forex market is the largest and most liquid market in the world and this includes all aspects of buying, selling, and exchange currency at current determined price. To understand this concept let’s take an example of traveler, an American(USA) tourist or traveler can’t pay in dollars to see the monuments in India because it’s not the locally accepted currency. A s such tourist has to exchange dollars into Indian rupees at the current exchange rate.
So, To Trade with foreign country it is the primary requirement to exchange currency to that particular country you are trading with. As Forex is the international market and one unique aspect of this market is there no central market place for foreign exchange. It is the platform where currency trading and all the transaction can be done electronically via computer around the world. You no need to exchange currency on one centralized place.
Forex Vs Stocks
In today’s world it is tough to make a business or finding a success in stock market. As traders all over the world are switching to FOREX because of the many advantage of the Forex market. Traders are very much interested in Forex as it is global market and is open everywhere in the world. There are many difference between Forex and stock market which will help you to find or trade with good one.
- In Forex you can do 24 hour trading as you can access the market for longer than operating hour.
- Forex is famous for its liquidity as Forex could be easier due to increased market liquidity over stocks.
- Market growth of Forex has been growing for the last 15 years unlike stock market.
- Small Forex market can lead to large gains or profit because Forex has potential of large profit as well as loss.
- In Forex there is requirement of middleman so that s/he can make you familiar to every information or other things related to Forex trading.
- It is good trading than stock as it gives opportunity to every single person to trade in Forex.
- Stock market does not allow you to trade 24 hour as it is limited has has its own time of trading.
- Stock market is less liquid than Forex market. Forex market has been increasing in liquidity over stock market.
- Forex market replaced stock market as stock market has returned to pre-2001 volume. Because of it stock market is not growing rather going down.
- Short term investment in stock market doesn’t lead to profit unlike Forex. Stock market is less impact in terms of profit.You must be very well aware of the pros and cons involved in short term investment plans.
- In stock market you will not be provided with middleman or broker who will help you to understand the concept of stock market and provide you information.
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How does Forex Trading Works ?
Trading in Forex is not so easy as it is the financial market in the world. And trading in Forex can not be done in one place or central location but it connected between participants through electronic communication network in various market around the world. Here you will learn about Forex working .
- Forex trading is the simultaneous process of buying in one currency and selling it to another.
- These two currency make up pair and what is known as “currency pair“.
- Currencies are always traded in pairs and each currency is represented by three letters. i.e. INR, USD etc.The first two letters represent the country and the third letter identifies the currency.
- The pairs are read in the opposite direction of mathematical ratios. For example INA/USD = 68.65
- Left side currency of (/) is called the base currency ( INA) and the currency of right side if slash is called quote currency ( U.S Dollar )
- This mean that 1 unit of base currency ( .i.e 1 rupee) is equal to 68.65 to U.S Doller
- You have to pay 68.65 to buy 1 U.S.Doller
- And in above example you will receive 68.65 when you sell 1 U.S. dollar
- Forex trading works 24 hour a day with non stop access to global Forex dealers.
This is how Forex trading works according to the current price of currencies. There are other indicators that helps in the work of Forex trading like Demand and Supply are the trading indicator that tell us about the market condition and price of stocks.
Before we move to the section of how to begin with Forex trading or how you can start Forex trading you must have a sound knowledge about online trading basics .
How to begin with Forex Trading ?
To commence any business or trade, primarily thing required is to understand that particular commerce or business in which you will trade with. Like how to invest, where to invest, how much invest, and stocks. These are the basic things that are necessary for any trader to deeply understand. Here we will let you about how to begin Forex trading?
- To trade in Forex it is very important you read and understand what is Forex trading? . As i have already discussed about it in the stating of this article.
Learn Forex Basics before investing in the Forex market as mentioned given below:-
- Forex Broker – Brokers are the requirement in any business or trade. So, in order to start Forex trading,you will need a broker to help you in Forex trading. The Forex broker only facilitates your buy and sell orders and also allows you to research into the markets.
- Trading Platform – You need a trading platform from which you can place your trades. Trading platform also helps you in technical analysis and also to see the current market prices.
- Forex Trading Hour – It is true that Forex is a market where you can work 24 hour a day, as it a market that never sleeps. And this is due to the fact that it is global market. You can always find any information at any time.
- What is a PIP ? Point in percentage (PIP) is a measure of change in a currency’s pair value. It uses to calculate profit and loss in Forex trading. When you trade, the more pips you make, the more profit you have. So it is important to understand PIP to make more profit. For example if you buy EURUSD at 1.31428 and sell it (or closing your trade) at 1.31528 then it would give you 100 PIPs in profit.
- Reading quotes – By reading quotes you would be able to see basic numbers appears on Forex quotes. The Bid price of the left and Ask price on right side. Bid price is use to buy and Ask price is use to sell at which you can sell. EURUSD quote would look like this 1.31428(Bid) 1.31420(Ask).
- Base currency – To trade in Forex you need to understand BASE currency. The base currency is the currency against which exchange rates are generally quoted in a given country. It is also called a first currency. For example – USD/IND, the U.S Dollar is base currency, IND/EUR, the IND is base currency.
- Quote currency – It is the currency that is also called second currency quoted in a currency pair in Forex. In a direct quote, Quote currency is foreign currency and in an indirect quote, quote currency is domestic currency. We can use this quotation to find a value of a currency determined by its comparison to another currency.
- Pair currency – The value of currency is determined by comparison to another currency. A currency pair is a quotation or structure of the currencies traded in the Forex market. The first currency of a currency pair is called the base currency, and the second currency is called the quote currency.
- Cross currency – A cross currency pair in Forex is that when one foreign currency is traded with another currency without including the U.S Dollar. Cross currency does not include U.S Dollar in trade. Like EUR/IND, EUR/AUD etc. As they are characterized by higher liquidity.
You need to understand all these POINTS to begin with Forex trading. All are equally important in Forex. Get the basics down and start on a simulator first.
Forex as Hedge !
Hedging is a simply way to protect yourself from any big loss in trading. Forex as hedge is simply a transaction by a Forex trader to prevent an existing or anticipated position from an unwanted move or loss in exchange rates. Hence, Forex exchange market provides hedge to traders so that they can protect themselves from any big loss in the Forex market. Some extent future market also offers hedge for currency risk, depending o the size of trade and actual currency involved. A Forex trader can be protected from downside risk by using Forex hedge properly, and also a trader who is long accustomed to foreign currency pair can be protected from loss or downside risk, while the trader who is a short or short term currency pair can only protect against upside risk. Hedging is a good way to protect or reduce the amount you loss in forex trading and would incur if some unexpected happened.
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Forex as Speculation !
As we know that trading or market always depend on factors such as demand and supply, interest rates, economic strength, tourism and many more .Because of the constant fluctuation there is always a chance of profit and risk of loss which we know as speculation. Speculation in Forex market is an act of buying and selling the foreign currency under the condition of uncertainty or fluctuation with a view of earning huge gains. There is always a risk as beliefs can be wrong. Often, the speculator buys the foreign currency when it is weak and sells it when it is strong. As speculators have expectation to get high return. The speculation said to have both the stabilization and destabilization impact on the exchange rate as speculator buy currency at cheaper rate and sell it at higher rate. Hence, there is always a risk of belief to get more in trading that can be wrong sometimes.
Top 5 Risks in Forex trading :-
Risk in trade is very common thing that every trader face. The Foreign Exchange Market or Forex Trading facilitates the buying and selling the currency around the world. As the trading is global there is always a chance of risk to lose (loss). Traders need to understand the various risks involved in Forex trading and careful while trading in Forex market.
- High Risk Investment – Trading foreign investment carries a high risk investment and may not be suitable for all investors. So before investing into foreign market you should considered your level of experience, your object, and risk appetite. You should be aware of all risk associated with foreign exchange.
- Interest Rate Risk – There is always a risk of interest rate. If country’s interest rates rise, its currency will also strengthen and vice versa. Due to the nature of interest rate there can be a effect on interest rates and difference between country change. Thus, Trader need to be very careful about interest rates of that particular country.
- Transaction Risk – There is always a risk in transaction as TR is associated with exchange rate. Rates are determined with the difference between time of beginning of a contract and when it settles. As Forex trading happens 24 hour basis which can result in exchange rate changes before trades have settled.
- Country Risk – Some countries have fixed rates such as USA (US Dollar) and central bank must sustain a adequate reserve to maintain a exchange rate. A currency crisis occurs due to frequent balance of payment deficit and result in devaluation of the currency. And this can effect on Forex trading prices.
- Supply and Demand risk – If county’s supply and demand is not good then it can effect Forex trading as prices of stock depend on its supply and demand. So Traders need to understand the concept of supply and demand as well.
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Pros and Cons of Forex Trading!
Forex is foreign exchange market and global market in the world and associated with high advantages (pros) as well as disadvantages (cons) laid out as follows:
Pros of Forex trading
- Offers high liquidity – Forex market provides high liquidity transaction as compares to other financial markets. It totally eliminates the possibility of price manipulation. One no needs to worry about the high volatility during opening and closing hours.
- 24 Hour work – Forex market provides facility to work 24 hour a day . You can get any information, changing in price etc at any time as it is open all the time.
- Ease of doing business – It is easy to work with Forex market. As there are hundred of indicators on Forex for short term trade as well as long term which makes trading easier.
- Low cost – Forex trading can have very low cost of brokerage or commission. There are no commissions in a real sense as most Forex brokers make profits from the spreads between Forex currencies. Hence you no need to worry about brokerage commission .
- No central exchange – There is no central exchange for Forex market. Various countries central banks interfere as needed. But Forex trading is only market where there is no insider and which is dependent on global factors.
Cons of Forex trading
- High risk – There is always a risk of profit and loss in Forex trading as it is global market. One can get multiple time of profit/loss in Forex trading. You need to be very careful while investing in the Forex.
- Self directed learning – In Forex market traders have to manage themselves as they have to manage their own trade and provided with no assistance unlike in other trade market. They have to guide themselves and manage their own work.
- High volatility – One can easily suffer huge losses in the highly volatile Forex market with no control over macro economic and geopolitical development. If things go wrong with stock then it would be huge loss for traders.
- Complex price determination process – As you know that Forex fluctuates and influenced by multiple factors that can become difficult to analyze price of stocks and most Forex trading happens on technical indicators, which is the primary reason for the high volatility in Forex markets. Getting the technical wrong will result in a loss.
You need to keep in mind all the pros and cons of Forex that can help you to invest or trade in Forex in future in a better way.
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Ways to approach Forex Market !
There are various ways to approach Forex market where you can deal in currency with different different countries. Traders and Investors must focus on matching a strong currency with weak currency.
The best ways to approach Forex market are :-
- ACTIVE TRADER – Forex trading or currency trading promotes as an “active trader” opportunity. In this way traders buy and sell security and with the in intention of holding security for short duration. Every active trader will try to make benefit through the short term price movement and will be more often focusing in the higher demand financial instruments .People always associate active trading with one of the most speculative trading strategies. This strategy also beneficial for trading brokers as they can make extra money from this strategy.
- LEVERAGE TRADING – This is a king of leverage trading approach of Forex trading where investors expecting the profit made to be grater than the interest payable. And therefore it becomes easier for a trader to open an account with a small amount of money than is necessary for stock market trading.
- CARRY TRADE – It is also necessary to understand the fundamental and long term benefit, when a currency is trending in a specific direction and is offering a positive interest deferential that provides a return on the investment plus appreciation on currency value. For example, a trader can buy the Australian dollar against the Japanese yen, and the Japanese interest rate is 0.05% and Australian interest rate is 4.75%, so trader can earn 4% on this trade.This is the carry trade approach in Forex.
These above approach can help you to find out best trade or investment in Forex.
Forex is global trading market just like stocks, you can trade with currency with different different country. Forex is big international market or trading spot in the world. Traders can take advantage of this market by trading around the world. For the beginners it can be little bit difficult but with the help of brokers one can easily trade in Forex market. But you need to be very careful while investing in Forex as it is online trading market you can be cheat by others. Hope this Forex trading beginner’s Guide will help you in future to invest in Forex market.