In the ever-evolving world of financial markets, Forex Trading has emerged as one of the fastest growing, dynamic and offering potentially rewarding opportunities for the Indian investors.
In this comprehensive guide, I’ll be telling you about the biggest global financial market. So fasten your seatbelts, we are about to take a financial flight and I hope you enjoy it.
What is forex?
What is forex you ask? Well to put it in simple terms, it is the exchange of one currency for another.
Have you ever travelled to a different country? If you have, you must have been to the airport. Every airport has a currency exchange where you can convert your Indian currency to the currency of the country you are travelling to.
Say you are travelling from India to Canada, so you need Canadian currency. You exchange your rupee to Canadian dollars. (Different currencies have different exchange rates)
If you are doing that, you are basically entering the forex markets because you exchanged one currency for another (not technically though).
Let’s get into the technical aspects of forex trading.
What is Forex Trading?
Forex Trading, also known as Forex Exchange, Forex, and FX is a global marketplace for trading currencies.
It is the largest and most liquid financial market in the world with a trading volume of $6 trillion.
You can trade currencies in the forex market for 24 hours a day (monday to friday). There is no physical exchange involved, meaning forex trading is done over the counter (OTC).
The market is overseen by a global network of banks and other financial institutions rather than a central exchange like the New York Stock Exchange.
As exchange rate pairs, currencies are traded against one another. One currency pair for trading the euro against the US dollar is EUR/USD, for instance.
Pairs of currencies, such as EUR/USD (Euro/US Dollar) or USD/JPY (US Dollar/Japanese Yen), are used to quote currencies.
Trading forex involves making bets on how much one currency is worth in relation to another.
For instance, you would purchase the EUR/USD pair if you believe the Euro would gain strength against the US Dollar. On the other hand, you would sell the same pair if you anticipated the opposite.
What are some of the popular forex currencies?
Important Forex terminologies
- Currency pairs: A currency pair is used in every forex deal. There are less common trades in addition to the majors (such exotics, which are currencies of emerging countries).
- Bid-ask Spread: Through bid-ask spread exchange rates are decided. Bid means price the buyer is willing to pay and Ask is the price the sellers need to pay
- Pip: A pip, which is short for percentage in points, is the smallest change in price that can occur within a pair of currencies. A pip is equal to 0.0001 since forex prices are stated to at least four decimal places.
- Lot: A lot, also referred to as a standardised unit of currency, is used in forex trading. Although there are micro (1,000) and mini (10,000) lots available for trading, the standard lot size is 100,000 units of currency.
- Leverage: Some traders might not be willing to put up as much money to execute a trade because of those large lot sizes.
Leverage, which is simply another word for borrowing money, makes it possible for traders to trade on the forex market without needing the full amount of money.
- Margin: Leverage trading isn’t free, though. Traders are required to make an initial deposit, referred to as margin.
Why do People trade in Forex?
Trading in forex has gained immense popularity among the Indian investors. But here are the primary reasons for trading in Forex Trading:
Because of the enormous scope of the forex market you can buy and sell currencies easily, in large quantities without having an apparent impact on exchange rates.
Forex markets are accessible to traders worldwide because they are open for business twenty-four hours a day, five days a week. Because of this flexibility, traders can modify their schedules to suit their needs.
The ability to profit from both rising and falling markets is one of the main advantages of forex trading. Market swings can be profitable for traders if they utilise the correct tactics.
Forex trading is frequently used by investors to diversify their holdings. Along with stocks, bonds, and other assets, they spread risk and improve their investment strategy by including currency trading.
Low Transaction Cost
Forex trading is relatively inexpensive, with most brokers charging a commission or spread rather than traditional fees.
How to Trade Forex?
Forex trading takes place in a decentralised market, meaning there is no central exchange. Instead, banks, financial institutions, governments, and individual traders form a network. Trading is made easier by the use of online platforms provided by forex brokers.
Follow these steps to get started with forex trading:
- Select a reliable forex broker
- Open a trading account
- Learn about the forex basics
- Develop a trading plan
- Practise with a demo account
- Start trading
How are Forex Trades Quoted?
The current exchange rate between two currencies is represented by each currency pair. Here’s how to understand that info:
Let me give you an example with USD/JPY
- The currency to the left is the base currency (USD – US Dollar)
- The currency to the right is the quote currency (JPY – japanese yen)
- The exchange rate shows how much of the quote currency is required to purchase one unit of the base currency. The amount of quote currency required to purchase one unit of base currency is represented by the exchange rate.
- Because of this, the quoted currency fluctuates according to the state of the market and the amount required to purchase one unit of the base currency, while the base currency is always expressed as one unit.
- In other words, if the USD/JPY exchange rate is 1.2, $1 will purchase ¥1.20, or, in other words, it will cost ¥1.20 to purchase $1.
- When the exchange rate rises, it means the base currency’s value has increased relative to the quoted currency (because $1 now buys more Japanese Yen), and when the exchange rate falls, it means the base currency’s value has decreased.
Ways to Trade Forex
The majority of forex trades are performed to speculate about future price fluctuations, much like stock trading, rather than with the intention of exchanging currencies.
Like stock traders, forex traders aim to sell currencies whose purchasing power they believe will decline or purchase currencies whose values they believe will rise in relation to other currencies.
There are three ways in which you can trade forex:
- Spot Market: Currency pairs are swapped on this main foreign exchange market, where supply and demand set real-time exchange rates.
- Forward Market: Forex traders have the option to lock in an exchange rate for a predetermined quantity of currency at a later time by entering into a legally binding (private) contract with another trader, as an alternative to making a trade at the moment.
- Futures Market: In the same way, traders can choose to purchase or sell a fixed quantity of a currency at a given exchange rate at a future date by means of a standardised contract.
Unlike the forwards market, which operates privately, this is conducted on an exchange.
Forex Trading can be profitable to both novice and experienced traders. Though this guide offers a strong foundation, it’s crucial to keep learning, practise, and be constantly up to date with the markets.
By doing this, you’ll have more confidence and a better chance of success when you start your forex trading career. As you gain experience, don’t forget to continuously improve your trading strategies and exercise caution when managing risk.
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