Basic of Trading
Over the past few decades, foreign exchange trading has become a huge market for investors around the world. This occurred for several reasons. First, you can always gain something from this market – it does not matter whether you are a beginner or an expert. Second, it is fairly easy to enter the forex trading market.
You do not need any elaborate permissions or authorizations in order to do so.
Third, the opportunities presented by this market are endless. There are truly no limits to your potential earnings. Finally, the forex market offers a wide range of currencies to choose from. This means that you are not restricted in terms of your options.
This article discusses the key elements of the foreign exchange market, including its workings, a brief history, an overview of its rising popularity, a review of the key players in the market, and a discussion of money making techniques
The Most Traded Market
Perhaps the biggest advantage of the foreign exchange market is its simplicity. You are basically buying and selling currencies as per the prevailing rates. Furthermore, the forex market is also the most liquid marketplace of them all. The average daily volume of trading stands at more than $6.6 trillion, which is a huge figure. In fact, it is so huge that no other financial asset comes anywhere near it.
In addition to the above, the foreign exchange market is interlinked with each and every daily purchase that you make. Every transaction that involves goods and services has an impact on the global currency markets. The purchases you make on a daily basis have an influence on the degree of liquidity in the market, thereby impacting the currency.
Moreover, foreign exchange is the most traded market in the world. Currencies are purchased and sold throughout the day. This market includes a wide range of participants, including governments, central banks, companies, trading houses, as well as retail traders. Despite this, understanding the market is fairly simple, and anyone can trade foreign exchange.
A Market That Runs Around the Clock
The foreign exchange market is active from Mondays to Fridays. It continues to work across different time zones as well. Although it is not open 24/7, one can definitely consider it to be a 24/5 market. There are certain cities that are considered to be the hubs of foreign exchange. These cities include New York, London, Singapore, Hong Kong, Sydney, and Zurich.
Another important aspect of this market is that it is completely decentralized. There is no single body that manages foreign exchange affairs. All trading is executed via the interbank market. The participants of this market can trade from anywhere in the world, as long as they have access to the internet.
Furthermore, it is also important to understand that every bank quotes different cross-currency rates. This is because there is no central body which decides the rate of foreign exchange. Therefore, traders must look at the different quotes online before making the decision to invest their money. There are numerous platforms that allow you to view live currency feeds from all the major banks.
History of the Forex Market
The origins of the forex market can be traced back to the end of the 19th century. This was the period when the Gold Standard was introduced. This was a mechanism that was developed to equate and backup currencies with gold. This standard was used for about five decades, until World War II. Towards the end of the war, European nations suffered from a shortage of gold reserves, thereby forcing them to look for an alternative to the gold standard.
Right before the war ended, there was an agreement at the Bretton Woods conference in the year 1944. This agreement stated that the Gold Standard would only be applied to US Dollars. This development made the US Dollar the most important currency in the world. Several countries began to consider the US Dollar as their reserve currency.
After that, during the 1970s, it was decided that the Gold Standard would no longer be applicable at all. At this point, a floating exchange rate system was adopted around the world. Under this system, currencies would be pitted against each other, and the rates would change on a regular basis. This system became extremely popular after the 1990s, and it continues to be used as of today.
What is Forex Trading? (Part 1/2)
The primary idea behind forex trading is to speculate the direction in which you feel a particular currency is headed.
For instance, if you have been following the news and you know that the US Dollar is likely to weaken against the Pound Sterling, then you simply sell the US Dollar and buy Pounds. The opposite is also true in this case. If you believe that the US Dollar is likely to rise against the Pound, then it would make sense to buy the Dollar and sell the Pounds.
What is Forex Trading? (Part 2/2)
In both of the above cases, you will make money if your prediction proves to be accurate. However, there is also a slight risk of losing money in case the prediction does not work. In any case, if you make smart and informed investment decisions, then the probability of making money rises. Some of the most popular global currencies include the following:
Euro – EUR
US Dollar – USD
Swiss Franc – CHF
Japanese Yen – JPY
British Pound – GBP
Canadian Dollar – CAD
Australian Dollar – AUD
Why is it So Popular?
The biggest factors that drive the popularity of foreign exchange markets include the ease of use and cost-effectiveness. You can log on to your trading account and start trading from anywhere.
There are numerous forex brokers out there in the market. You can choose one of the reputable brokers and start trading within minutes. The simplest forex strategy is to keep an eye out for the latest news. This is because such news can have a major impact on foreign exchange movements.
Another reason why foreign exchange trading is so popular is because of leverage. This feature is offered by most brokers out there in the market. You can invest very little money and take a substantial position in a currency.
Such leverage enables you to generate outsized returns within a short period of time. Finally, forex trading has also been made popular by attractive promotions and discounts offered by some of the brokers. Certain brokers offer you free money just to trade on their platform, thereby improving your earning potential.
How to Make Money in the Forex Market?
There are two major ways in which you can generate returns within the forex market. The first way is to ensure that you have built up a strong knowledge base about the workings of the industry.
The more knowledge you have, the better your chances of succeeding in the market. There are several forex brokers who offer extensive educational material to their users. Such material can be used to identify trends in the market and exploit price differences.
The other way is to build a long-term strategy. This method works well because a well-thought-out long-term trading strategy is likely to maximize your returns. You may lose some money in the beginning, but if you are clear in terms of your strategy, then you will end up making lots of money.
You need to remember that forex trading is often a game of patience. You must remain patient and wait before making your moves.
Who are the Key Players?
- Central Banks: Central banks are tasked with developing the monetary policy of their respective governments. In order to do this, they tend to leverage their exchange rates. Further, central banks aim to provide stability to their respective markets, and they achieve this by orchestrating currency appreciation/depreciation as per the need of the market.
- Private Sector Companies: Private sector companies and banks also take part in the forex markets. These companies typically use foreign exchange in order to purchase goods and services from other parts of the world. Similarly, banks can also make money by speculating about currency prices.
- Investment Firms: There are numerous investment firms whose primary objective is to make money by investing in the forex markets. They do so by tracking the markets and making informed investment decisions. Some investment firms manage to generate huge profits just by making smart investments.
- Individual Forex Traders: Retail forex traders are also an extremely important player in the forex market. Traders participate in the forex market in order to maximize their earnings. Traders like you tend to open accounts with brokers and buy/sell currency pairs on a regular basis. These transactions help traders make money.