iCrowdNewswire Mar 2, 2021 4:28 PM ET
Forex is a global market that provides incredible liquidity for you, consisting of an immense daily trading volume.
As investment plays a vital role in forex trading, it is not suitable for an inexperienced trader. However, the forex market offers you some absolute advantages over other markets after you learn the ropes. Here, we will provide you all the basic information regarding forex and forex trading.
We will also answer your question whether forex trading is worth it in a detailed way to help you make the decision.
What is Forex?
The foreign exchange (also known as forex or FX) market is the world’s most traded and liquid asset market for you to exchange national currencies against one another, with a turnover of $5.1 trillion per day.
How is Forex Regulated?
Forex faces unique challenges regarding market regulation because of the magnitude and latitude while being the largest market for you.
Have you wondered how a market is regulated that is operating round the clock, across the world?
To your wonder, the Forex market is not operated by any centralized body. Alternatively, various administrative and individual bodies oversee it around the globe. The international directorial bodies manage Forex by setting certain principles which all participants under their jurisdiction must comply with.
These regulations consist of getting registered and licensed with the regulatory body, sustaining regular audits, conveying specific changes of facility to their clients, and a few more. The regulations help to ensure fairness and transparency while you are involved in foreign exchange.
Now that you know what forex stands for, let’s begin with forex trading along with its pros and cons.
What Forex Trading Stands For?
FX or Forex market trading is basically currency trading within a network where you participate as buyer-seller and place lots at your desired price. FX is a medium of changing currency from one country currency to another. You can’t simply change it without the exchange fee. That’s where Forex occurs.
A number of forex transactions are made for personal or commercial usages, such as while traveling abroad.
The price movements of some currencies get excessively unstable because of the huge amount of currency conversion on a regular basis. The nature of volatility makes traders to build some greed, gives opportunity for high profits while also increasing the risk.
How Forex Trading Works?
Currency trading is usually when you buy one currency and simultaneously sell another. In forex trading, you need to actively speculate the subsequent situation of currencies to profit from buying and selling currencies.
Now, is becoming a forex trader worth it? Yes, it is.
It can potentially bring profits and help you earn a good amount of money. You can also diversify your portfolio and make a name for yourself by being a forex trader. Even though it is definitely worthy, you need to be well informed, dedicated, have self-control, and patience to be successful in this.
Every institution and individuals can globally participate in currency trading every second. One of the prominent differences between the forex market and other financial markets is, forex is OTC. You can trade currencies over forex brokers in whatever market is open at that time.
Why Be A Trader in the Forex Market?
A prospective forex trader aims at highest profits as do all real life traders. As a trader, you need to focus on the low risk trading opportunities in order to make the best out of your investment. With millions of investors with billions worth investments, you can be rest assured that forex is something that would be worthy of your money and the sweat.
Let us observe nine best arguments that prove forex trading a must for you:
Flexibility to Choose
You can place buy or sell orders at any price at your chosen pairs. It depends on your financial target and preference on how you want to conduct your trading. You can use the secondary or derivative products, such as CFDs (Contract For Differences) to go short on other markets.
In this case, you need to buy and sell currencies simultaneously. The one you are going to buy is known as the transaction asset. On the other hand, a counter or quote asset is the one you will be letting go. Here, you need to note that the rate of a currency pair is the price quote of the exchange rate for two different currencies in the currency market.
Let us make it easier for you with an example. If you choose the EUR/USD currency pair, the main asset will be EUR whereas the counter currency will be USD. Now, suppose this forex pair is trading at 1, then 1 Euro will be equivalent to 1.22 United States Dollar.
Now, if you speculate that the rate of the Euro is going to rise against the USD, you should buy the pair or go long. On the contrary, if you speculate that the value of the Euro is going to fall, you need to let go of the pair or go short.
Your profit or loss will be relying on the percentile of getting your presumption right, meaning you have the chance to gain profit no matter how the market condition changes.
Forex Trading Hours
The trading hours in the Forex market is very flexible and convenient for the traders. It remains open for you round the day, throughout the week- except weekends. You can trade in the trading market from 9 pm Sunday to 10 pm Friday.
Why do you require such lengthy hours? Because, in the Forex market, the transactions are done between traders directly instead of using a central media for exchange. Traders complete their transactions or exchange over the counter (OTC).
Moreover, Forex is a worldwide market with almost no barriers. So, as an active participant, you can always get benefitted by forex trading hours of different active sessions in this global market.
However, you need to note that the opening hours of the FX market may vary in a few specific months. The length of the daytime differs given the country’s geographic location, so does trading hours.
Can You Trade on the Weekends?
The answer is yes. The market remains inactive or closed to only retails sellers- excluding primary banks and associated organizations. So you can easily trade in the Foreign Exchange Market on weekends as well. However, you may face a price imparity in the middle of the Friday close and Sunday open. This imparity is termed as gap.
Furthermore, you should be well aware of the trading hours on weekends because of the gap and adjust your position likewise. Your position can be threatened by this gap and to avoid the risk, you may need to close your position on Friday evening or place stops and limits. In this way, you will be able to handle the risk.
Consisting of a great quantity of traders seeking opportunities to conduct a deal at any time of the day, the Forex market places top for its liquidity.
The elevated liquidity means you can conduct, and complete transactions fast and effortlessly at any given time. So, the costs of the transaction are frequently very less. Hence, it allows you to have chances to presume the price shifts efficiently.
Over $5 trillion dollars of currency is converted by individual traders, companies, and banks each day, and a significant number of such traders merely intend to generate a profit.
Profit From Leverage
You will get the opportunity to attain a spot in the FX market because of its leverage. You will be able to do it just by paying a small percentage of the full cost of the spot in advance. It is referred to as margin.
Your earned profit or loss will represent the full value of your position at the point you close it. So, you can make a chunk of profits from a comparatively little investment by trading on margin. Nevertheless, it can also enhance the amount of your loss to the extent where it might exceed your initial deposit.
Therefore, it is important that you consider the entire value of your position that is leveraged before you jump into trading.
Volatility in Forex Trading
The high volume of currency conversions every single day translates to billions of dollars every minute, which causes the instability of the price movements of some currencies. You can potentially gain large profits by speculating on price movements in whichever direction you may choose to.
However, volatility can be a double-edged sword for you! The situation of the market can turn against you within a very short time. So it is important to limit your exposure with risk-management tools.
Variety of Forex Pairs
Currency trading offers you the chance to exchange a wide range of forex pairs, presuming the international incidents and the corresponding stability of economical conditions.
There are various types of pairs available from which you can pick to process your exchange, such as Major pairs, Minor Pairs, Emerging Pairs etc.
Hedge and Save
A strategy that you can use to offset potential losses or gains in the Foreign Exchange Market is known as Hedging.
However, volatility is part of what makes the Forex market so appealing for you, hedging can be an easy way to mitigate your loss or limit it to a known extent. In this way, you can save yourself from avoidable risks.
How to Hedge?
As a Forex trader, you can open several strategic positions to hedge. You can also make a hedge against a particular currency by using two different currencies. For example, you could buy a long position in EUR/USD and a short position in USD/CHF. In this case, may not be exact but you would be hedging your USD exposure.
Furthermore, you can also hedge to mitigate your loss in other markets as well, such as, commodity market.
Risks in Forex Trading
You may find currency trading a bit risky and tricky. It involves diversified degrees of regulation, and the instruments of forex are not standardized. Consequently, foreign exchange trading is almost entirely uncontrolled in a few parts of the world.
The interbank foreign exchange market consists of banks conducting exchanges with one another across the globe. The banks, all by themselves, have to appoint and accept sovereign risk and credit risk.
Also, they have established internal processes to keep themselves as safe as possible. Regulations like these are industry-imposed, and they aim for the protection of every participating bank.
As the forex market is formed by every single participating bank providing offers and bids for a particular currency, the pricing mechanism of the market is mainly based on supply and demand. Since the trade flows are quite large within the system, it is difficult for rogue traders to create any influence on the rate of a currency.
This system helps to create clarity and lucidity in the market for people who are investors with access to interbank trading.
Most minor retail participants trade with comparatively small and semi-unregulated forex traders, which might allow them to re-quote prices and even conduct exchanges against their own clients. Depending on the position of the dealer, there may be some government and industry standards. However, those safeguards can be inconsistent across the globe.
If you are planning to participate in forex trading as a retail investor, you must spend some time investigating a forex dealer to find out whether it is regulated in the U.S. or the U.K. (as dealers tend to have more oversight in the U.S. and U.K.) or in a country with lax rules and oversight.
You also need to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent to minimize the risk.
Why Choose Forex in Place of Stocks?
Can’t decide which one you should go for? Your decision to choose either of them on leverage should depend on which asset you are interested in trading. Which one are you interested in trading? Currencies or shares?
However, there are a few prime reasons why you should prefer trading forex over stocks such as, flexibility to choose your go (long or short), market opening hours (weekend hours), higher liquidity, greater volatility (greater profit) and so on.
While taking your decision whether forex or the stock market is more suitable for you, definitely consider your perspective towards risk-management as well as your financial targets.
If you are a trader with limited funds, day trading or swing trading in little amounts would be easier for you in the Forex market in comparison to other markets.
If you are planning to sustain in the market, and continue trading for a good long time, you need to start with larger funds. In such cases, long-term elementary-based trading or a carry trade can make the trading profitable for you.
If you focus on understanding the macroeconomic fundamentals driving currency values and try to gather experiences with technical analysis, you are more likely to gain significant profits in the forex market.
If you are a risk-taker, have a fine idea about risk-management, and have set your financial goals straight, you may consider investing in forex trading as it will worth your time and persistence without any doubt.
So, did it help you to make your decision-making any easier? Have you found the information you were looking for? If it provided you the answers to your questions, we will be glad to know. Share your opinions with us in the comment section. We would appreciate your feedback! Find More Money making hacks here.
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