An overview of foreign exchange
With the accelerating demand of foreign exchange services all around the world, many traders, amateurs and pros alike, have decided to divert their attention towards the forex market.
Foreign exchange- as the name suggests involves the conversion of currencies in one suitable form to complete a transaction. Foreign exchange market is not only involved in trading but also in several other industries where inter-currency transactions are needed.
Now, the question that arises is why a foreign exchange market is needed?
To be very honest, foreign exchange is indeed based on currency exchanges. Let’s take an example- you are an American resident but want to buy a designer bag from a British fashion house which does not have any store in the US. So, you will have to order online. Let’s say the product is worth 210€. But, this is European currency which is not acceptable in the US and vice versa.
So, you need to convert US dollars into the Sterling pounds and then pay for the product. This is what happens in foreign exchange, with the only difference that the forex market carries on all the currency transactions electronically all over the world.
What is forex trading?
Forex trading is a kind of investment strategy where you convert currencies at a fixed rate. With the daily changes in the currency values, the forex market is highly volatile which is why several traders are attracted towards this exchange market. Here, all the major currencies are traded in the form of pairs. So, if one unit has a lower value, the other will automatically have a higher value.
For instance, a trader wants to trade in AUD and EUR currency pairs at an exchange rate of 0.5%. This means that for buying 1 € EUR, the trader has to pay $0.5 in USD. Every day, the global forex trading volume has been approximated to be around $5 to $6 trillion, making the foreign exchange trading market the largest and the best platform for exchanging free floating currencies.
History of forex
Even though some studies suggest that the telegram forex signals have deep-seated roots that can be traced back to the age-old barter system, it is in the late 20th century which marked the establishment of the modern forex market. The Bretton Woods system was coined and put into effect between the 1940s and 1970s where the US dollar was made a referential and reserving currency. Several international countries decided their currency rates based on the price of 1 USD. After this, the total amount in dollars was to be converted into gold at a standard rate of 35$ USD per ounce.
The rate at which the currencies had to be exchanged was fixed within a certain value and the maximum deviation that was allowed was 1%. This greatly helped to stabilize the international monetary system and paved the way to modern forex market.
How forex trading works?
Forex market doesn’t operate on a centralized basis in a particular time zone. Instead, the exchange centers are located in eight prime locations all around the world including Tokyo, Sydney, London and New York. Being in different global positions, the forex market works on different time zones, and hence, trade can be initiated 24 hours for five and a half days in a week.
Here, the currencies are traded in pairs- the first and independent currency is known to be the base currency while the second, dependent one is the quote currency. It is the currency pair cost which decides the trading price which signifies how much the base currency is worth in terms of the quote currency.
The currency pair price is quoted and based on the estimation, the trader opens a position in the forex market. It can be a long position where the trader will make a profit only if the base currency price increases against the quote currency. But, if the base currency decreases in price, the currency pair will also decrease in value and hence, the trader will make a deal in losses. The opposite happens when someone is opening a short position in the market.
What are the advantages of trading in the forex market?
To be very honest, forex trading like every other market has its own ups and downs. In fact, it is the volatility of this platform that attracts so many traders. So, to know the forex market from close, you need to understand what the perks of this investment strategy trading are.
1. Trading can be done for 24 hours
One of the major benefits of the forex market is that trading is done over-the-counter fashion rather than in a centralized manner. With the absence of one single governing authority, the forex market is in operation for 24 hours a day. Trades are done based on time zone differences between the eight prime trading centers distributed around the world.
2. The market offers high liquidity
The Forex market has a trading volume of around $5 trillion a day. Now, this had to mean something, right? Well, obviously it does and the significance is revealed in terms of forex liquidity. Here, you can convert your assets into the desired currency pair and buy or sell the pairs based on the estimated prices. You won’t have to wait for too long to get the trade started, and that’s why forex is so popular.
3. Transaction costs are very minimal
Forex trading is indeed cheap in terms of the transaction costs you will have to pay to a broker who facilitates a certain trade. Brokers make profits from the spreads. A spread is the difference between the bid or sell price and the ask or buy price, and it is measured in PIP or Point In Percentage. For example, if you want to trade in GBP/USD, and the bid price is 0.11334 while the ask price is 0.11336, the transaction cost that you need to pay to the broker is 2 pip.
4. Buying or selling currencies is in trader’s control
Forex market has gained a lot of popularity in recent years. With small deviations in currency rates and the international market becoming more volatile than before, traders are more interested in this particular finance market. With proper price estimation and a tactfully devised forex strategy, one can make profits easily.