Forex is the short and modern name of Foreign Exchange. Forex some-times interchangeably are also called or known as Currency Exchange. Foreign Exchange market (Forex Market) is the market where participants of the market execute the transactions like buying, selling and exchanging the currencies by speculating the prices at the existing or prearranged rate.
Forex: let’s go in deep
On the basis of demand of one currency to another, foreign exchange market sets the current price of the currency but it does not determine the relative value of the underlying currency, such evaluation depends on some other factors like economic policies of the country, the political situation in the country etc. (doesn’t matter the country, could be South Africa or another one).
Currency Exchange rate fluctuations depend on actual monetary as well as forecasted monetary flow by taking into account the changes in gross domestic product, inflation, interest rate parity, monetary policies of the country, news regarding major mergers of the companies and other economic public releases. Foreign exchange markets include central banks, investment houses, financial institutions and forex brokers and investors Forex markets are extremely liquid in a sense that foreign currencies are traded over the counter among national/international brokers and dealers directly without the involvement of any clearinghouse or the central exchange. This type of trading sometimes also called retail foreign exchange trading.
Forex market is the largest financial market in the world where millions of the trading transactions take place on daily basis and approximately more than $5 trillion trading took place on every day. Forex Market or the currency market is a worldwide decentralized or over the counter market. Over the Counter (OTC) Market means, where the trading is taking place by the use of dealers network instead of a centralized exchange. Although there is the presence of major currency trading exchanges in the world but still there is no consolidated or central platform for the most of the foreign currency trade. Because of over the counter market environment, there are different interrelated marketplaces available for the trading of many currencies and instruments.
Trading of the currency took place consistently over the day, that trading session end in one part of the world and then starts another part of the world, rather than weekends.
Forex and trading
In the forex market currencies are traded in pairs that mean buying one currency and selling another currency concurrently at the same time. A currency pair comprises of two currencies i.e. base currency and counter or quoted currency. Based currency valued in terms of other currency by using the exchange rate.
The base currency at all times equal to one. In the case of currency pair EUR/USD = 1.2891.The first currency i.e. EUR is the base currency and other currency i.e. USD is the counter currency. The quote read as one (1) EUR is equal to USD 1.3651 or in other words, € 1 is worth of $ 1.2891. A trader needs to spend $ 1.2891 for buying the € 1. The ask/bid price, pip, and spread are the key terms that are used in the forex market. The Ask price is the price on which an investor agrees to buy a currency or it is the price on which the market or seller agrees to sell the currency to the investor. The Bid price is a price on which the investor sells a particular currency or the market/buyer agrees to pay for that currency to the seller.
Point in Percentage (PIP) represents a change in the price of a currency pair due to exchange rates. A pip denotes to a fourth decimal in the amount of a currency. One pip symbolizes as 0.0001. Normally, currency pairs make an exhibition of four decimal places while only in the case of the Japanese yen currency pair shows just two decimals. PIP sometimes also called Price Interest Point (PIP). Forex spread is the transaction cost of a trading for the forex trader and the commission or service charges for a broker or the trading platform. It is the difference between the Bid and Asks price of a trading commodity or a currency pair.
In forex trading, the term leverage is most frequently used. Leverage denotes the amount of loan given to the investor by the broker or the trading platform. The ratio of loan varies from broker to broker. In forex trading, leverage ratio ranges between 1: 40 to 1:200 depending upon the leverage policy of the trading platform. That means on every $1 investment a trader can enhance the trading bid up to $40 or $200. The facility of leverage is very useful for the traders when they correctly assess the market but have less balance of amount in his trading account. The leverage provided by the trading platform in order gain the advantage of the current market situation by investing more money in making more profit. So the investors are very concerned about this facility to grasp the market opportunity for enhancing their margins.
Is Forex easy?
The forex market offers high returns but it also confers greater risk exposures.
There are numerous factors that contribute to the success of the forex trading e.g. choosing the right trading platform or broker, adopting the risk mitigation measures, investment diversification strategy and know-how of forex trading etc. Financial institutions and large forex trading companies make transactions to manage the risk of foreign exchange portfolio in their assets line by using the different financial techniques also known as financial instruments like foreign currency swap, by making forwards / future contracts or also by using the foreign exchange options.
Forex trading has gained the popularity by the reason of high returns on the investment during a very short period of time that attracts to the investors. Forex trading is most liquid market of the world which makes it so risky. In forex trading, market situations are sometimes changed so rapidly that requires a prompt response and instant decision making in order to save the investment from loss and making the profit from the current situation.
If you are in South Africa or in another country remember that forex is not so easy. Before to start trading read our advices and learn by yourself.
If you want to know more about this topic, watch this video about forex or comment the article.