The most obvious question at this point is; what is forex? Forex is the short form of foreign exchange. It refers to the activities that take place in the international currency exchange environment. This market has players who include investors (parties who pump money into the market) and speculators (those who analyse market trends and invest in low volumes hoping to make a big return).
Understanding Foreign Exchange Trading
Think about an event where the market expects the value of the sterling pound to slump in comparison to another currency, say the euro. In a situation like this, traders would rush to swap pounds with euros. After getting euros, the traders watch the market and when the euro rises in value, they will now sell again to obtain a lot more pounds than they had when the market opened. That is how traders make profit in forex trading.
In a way, forex trading has similarities with stock trading. Those in the stock market buy stocks when they expect the value to increase in the future. They will then wait until the prices soar and sell them for a profit. To avoid making losses, they will dump the stocks if they speculate that the price will fall at some point in the future. Forex traders do the same thing. They buy currencies and if they speculate a future rise in value, they sell the currencies. However, if they have a reason to suspect that its value will hit a future slump, they will dump them, or not purchase at all.
Understanding exchange rates
In the foreign exchange environment, the different currencies of the world have their allotted value. The market is decentralized in such a way that there is no designated place for carrying out transactions. Deals take place among parties in the market at different places. It is almost impossible to find two currencies that share the same value on the foreign exchange market. In addition, values are constantly changing. The value a currency fetches today is not the same it will fetch tomorrow.
Let us take a hypothetical example. If on 5th march,2014 the sterling pound is worth 1.2 euros, and on 6th march ,2015,the pound is worth 1.4 euros, then the pound has raised its value against the euro by 16.7%
Reasons why the rates of exchange vary
Trading in currency is just like trading in any other product. Currencies are susceptible to the law of demand and supply. When the demand of a currency goes up, then so does its price. If the demand goes down, the price falls. Demand is very interlinked with supply. For example, an increase in supply has a chain reaction. For example, if the supply for the pound increases, then its demand goes down. So does its price and vice versa.
A speculative advantage is unique to foreign exchange. You can always swap currencies. If you think that the dollar is going to fall, you can sell it to buy pounds. This pattern introduces a strange perspective. In forex trading, you can make a profit doing the same thing fellow traders are doing, and you can make a profit by doing what they are not doing. The same applies to losses. Correlations also influence the value of a currency. There are also political and economic reasons why currencies rise and fall. For example, the Zimbabwean dollar is at a low asking price because of the struggles their economy has been facing over the last few years.
The advantages of forex trading
Low costs of trade
Commissions are low and very competitive. Traders obtain backing from liquidity providers who do not charge any hidden costs. This makes it easy to venture into for traders. It also makes the market place a very flexible venue for trading.
There is always some forex trading taking place all the time. There is no opening or closing hours. This means that you can actually trade for every single hour of the day for a whole week. Whenever one country is sleeping, in the other, trade goes on. Supposing it was midnight in England and afternoon in the states, you can still wake up and trade with the Americans, regardless of the time difference.
Easy Global trading opportunities
The idea of a global village widens every day.it is becoming easier to trade with people you have never met and may never meet. This is because forex trade gives investors a chance to invest in diverse countries while avoiding the hassle of actually travelling there to make business arrangements or obtain financial statements and licenses written in foreign languages.
Contrary to the rules of other financial markets, this market has no restrictions on either going short or long, you can sell a currency when you have reason to believe that its valuation is going to slump. You can also buy a currency when you suspect that its value is going to go up. When the event happens, you make profits. If it does not, you can either remain even or make a loss, depending on both internal factors and global concerns. There are no peaks or slump periods in the general sense; the truth is that you can make profits or losses at any time.
There is a very huge amount of liquidity in this market. As a result, the level of advantage is very high. This simply means that you can exploit the smallest of changes in the market place at any time to make a move. Leverage has two sides to it. You can make a move that makes a large profit, or you can make a move that puts you out of business-at least for that day. Traders understand that it is always a half chance and that it does not necessarily bring profits. It is always a gamble, but a well calculated one.
Forex trade is a market with monumental liquidity. Trade revolves around few strong currencies. However, there are hundreds of thousands of people trading at the same time. This aspect makes entrance and penetration into the market very easy for big and small investment entities. It is also easy for an individual or firm to leave the market place at any time.