Currency trading dates back to biblical times and 4th century A.D. People could purchase more gold with the Greek coin than European coin. During the period of medieval, bank came in to picture for currency trading. In the 17th-18th century, Active Forex market begins in Amsterdam. It has seen world wars and many difficulties. A major change in the policies of the several nations boosted the Forex.
The full form of Forex is foreign exchange. It is also known as currency market. It comprises activity of currency trading. Let us break into layman terms- Forex involves trading different currencies against each other. Consider an example where a student from the U.S. visits Europe and he is interested to study in one of the colleges of Sweden. He needs to pay the college fees. Euro is the currency, which he is looking for. To make the payment, he needs to buy Euro in an exchange with the dollar. The broker who pays you the Euro for dollar, need to buy the same from the exchange. This buying processed is carried out in Forex and this market is called Forex trading. It is a market of 5 trillion dollars. It is the most liquid and largest market in the world.
Forex in detail
To start the Forex trading, one needs to have an account, which can be open with Forex broker. The trading is bit entirely different from exchanging money from foreign outlets. US Dollar and Euro are the most traded currency in the Forex. One of the interesting features of Forex trading is the leverage. It is the plus point of Forex trading as compared to Stock exchange. The broker offers 15:1 or 2:1 leverage in case of Stock, but for Forex it is 200:1 or 100:1 or 50:1. The leverage factors depend on the amount of trade.
The Forex is a war between two currencies. Here one currency is compared with the other. The two currencies in this tug of war are called as pair. One among them is base currency and the other is called as counter currency. Trading this pairs, that is buying or selling this currency depends on the appreciation or depreciation factor of the currency. Your investment depends whether base currency falls or rises against the counter currency. In Forex, you will notice the decimal up to five places in the quotes of currency pairs. A change in the decimal from fourth places is termed as PIP. ‘PIP’ stands for Percentage in Points. Consider the price of USD / EUR changes from 1.33840 to 1.33960- This implies the rise of 12(96-84) pips. The difference between the quote numbers is called as spread. Like, in this case, the spread is 12 pips or 0.0012.
- Spot market– In this market the currencies are traded based on the current value in the market. The buying or selling price is decided based on supply and demand for the currency. The trading of currency is dependent on factors like the performance of the currency, interest rates, political state or the economic policies of the country. When the buying or selling of currency gets a final approval, it is called ‘spot deal’. Actual currencies are the real deal in this market.
- Forward market– This market involves some ‘contracts’. The contract consists of agreement about currency, the price of the currency, and date of settlement. The buying and selling parties frame the contracts.
- Future market– This is similar to forward market as it also has contracts, which says about settlement date, the volume of trade, minimum profit, and a lot more things. These are traded in the public commodity market.
In earlier days, individual investors focused on the Future market, because of its long-term offerings. Recent days, use of electronic trading place the spot market on the top spot.
Making money through business becomes difficult if it is loaded with a lot of competition. In Forex, it is different; one can make a lot of money if more people are involved. It demands competition, which leads to a lot of fluctuation in the market. This variation is the most needed thing to gain a profit. Here are some tips to help you with trading-
- There are chances that you might lose more, instead of a gain, proper knowledge is necessary for Forex. Contents on the web are sufficient to educate yourself.
- Take up online session to practice the investing. These sessions will provide Do’s and Don’ts knowledge of the trading. Many forex brokers offer a free demo account to help you with trading.
- One needs to be mentally strong and stable to start the trading else greed or fear of losing is bad for your business.
- Be a rational version; limit your trading to some pips. Once you reach the limit, cut-off yourself completely from trading. Even if the market is laying golden eggs, stay away from it. These habits help you on a long run.
Consider all these points to opt for healthy and profitable trading.