What is Forex Trading?

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Forex Trading
Forex Trading

Forex trading is also known as “foreign exchange”, is simply a worldwide marketplace for currency trading. “Forex Trading” supports international traders and investors by allowing them to exchange their currencies. For example, it permits a business person from France to import goods from the US and pay in dollars, although his earning in France is in Euros. It also props up the evaluation and speculation relative to the currency value, based on the gap of interest rate between two currencies.

Forex trading is the world`s largest trading platform in the provision of trading volume. Trading volume is the amount of security that trades during a particular given period.

International larger banks and various financial centers around the world are the major participants of forex trading markets performing the role of anchors of trading between buyers and sellers.

Unique Features

  • It provides 24hours service during the weekdays.
  • There are no geographical boundaries for forex trading.
  • Less profit margin as compared to other fixed income markets.
  • There are a variety of factors that affect exchange rates.
  • The utilization of leverage to increase the profit margins according to the “account size”.

Background of Forex Trading

People used to exchange and trade currency from ancient times. They helped others to change currency and get a commission from them. They were living in Israel and people sometimes called them “Kollybistes”. The goldsmiths and silversmiths also worked as currency traders in ancient times. The monopoly was created by the Byzantine government on currency exchange during the 4thAD.

Exchange and currency were the significant elements of business in the old times, allowing people to sell and buy products like food or raw materials. If an Egyptian coin retained more gold than a Greek coin because of its content or size, then a trader could exchange fewer Egyptian gold coins for more Greek ones, or more tangible goods. Because of this, many circulating currencies in the world today have a fixed value to a particular quantity of a renowned standard, Like gold and silver.

During the 15th AD, an Italian banking family called the “Medici family” introduced banks at various places in the world to exchange currencies to act on behalf of the textile traders. The bank introduced an “account book”, enclosed with columned entries demonstrating the amount of local and foreign currencies and the information showing the keeping of an account with a foreign bank.

Amsterdam successfully carried on an active Forex trading market during the 17TH or 18th AD.

In 1704, currency trading took place among agents performing in the concerns of England and Holland.

The gold standard began in the year “1880”. This year is considered to be the start of modern foreign exchange.

There was very limited control on international trade before the First World War, but after the beginning of the war, countries dropped out of the “gold standard” monetary system.

Purpose of Forex Market

This market is exclusively liable to facilitate international trade. The currency exchange markets allow organizations to perform their business activities beyond the country’s borders. Like in other markets, a powerful currency is more valuable and is also able to rule in the “international trade market”. The trader`s activities in the “forex market” also influence its wealth. When any uncertain situation occurs in the market, investors cause price adjustment, and that influences the return margin of traders.

Key Sectors of Forex Market

In the economy of any country, there are two main sectors in the foreign exchange market: the “institutional sector” and the “retail sector”. “Institutional market” has some major impacts on the economy, because all the key financial people who make economic policies of the country belong to this sector. Large institutions are accountable for lending money, thus influencing business activities in the economy. The economies based on supply and demand forces the institutions to prosper, while the retail sector is based on individuals with small-scale businesses.

Impact of Forex Trading on the Economy

It has a major impact on the economy of the country. Economic activities play a vital role to determine the demand of the currency of that particular country, following the major impact on the worth of a currency. If a particular currency has a steady demand because of the continuous increase in its exports and tourism activities, then the country’s economy will grow. Sometimes, when the demand for a particular currency has decreased for some reason, then countries bring some short-term and long-term changes in their policies to boost up their economy. Many countries consistently focus on adding up value in their products to be exported, to generate more profits in the “forex market”. In general, the forces that create demand for a particular currency, eventually determine the performance of the forex market; consequently, it impacts the economy as a whole either positively or negatively.

Advantages and Disadvantages of Forex Trading

Advantages

·       Flexibility

This market provides a lot of flexibility to its trades. There is no particular limit of amount to be traded, one can use a little or a big amount for trading in the market. Furthermore, it is quite easy to trade in this market because of fewer trade restrictions. It provides 24-hour service to the people except for weekends.

·       Trading opportunities

Forex heatmap” offers multiple trading options to its traders. They can trade in multiple currency pairs. In addition, they also have an option to enter in spot trade or future agreements. These types of agreements are available in various sizes and with a range of maturities to meet the traders` needs.

·       Transactional Costs

“Forex market” offers low transactional cost as compared to other different markets. This is mainly since the Forex market is largely worked by the dealers and they offer a “two-way quote” after keeping a spread for themselves to cover the risk factors.

·       Leverage

It provides the largest part of leverage as compared to other “financial asset markets”. The provision in the Forex market provides financiers to lift their basic investments as much as they can. This amplifies both gains as well as profit. Therefore, the activities in the Forex market are generally small.

Disadvantages

·       Oppose party Risk

“Forex market” is a global market. So, the rules of the “Forex market” are a tricky matter since it relates to the power of the currencies of numerous countries. This makes a situation where the “Forex market” is mainly unfettered. So, there are no central exchanges that guarantee the threat-free execution of dealers.

·       Leverage Risk

There are chances that a person may lose his entire investment in a few minutes. If he/she places a highly leveraged bet. Beginner investors are more prone to make such faults as they do not recognize the level of risk that leverage carries along.

·       Operational Risk

Forex trading operations are quite hard to handle. This is just because the “Forex market” works every time where people do not. Consequently, dealers have to resort to algorithms to secure their investment value when they are away. Thus, if an individual doesn’t have the funds or the know-how to handle their position when they are absent/ away. “Forex markets” could cause a considerable loss of value on the weekends or at night.

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