Forex for beginners
Forex is one of the most innovative ways to earns extra money. At least $5 trillion dollars are traded every day. You can earn a lot if you invest in the forex market. High liquidity and high volatility can help you reach the levels of earnings that you have not dreamt. To know more about the basics of the market please fill up the form.
Forex is a commercial acronym for foreign exchange. Forex trading involves with the trading in the different currencies of the world. Each country has it’s own currency. It stands for its economic identity. Currencies are exchanged among the countries due to commercial trade in goods and services or transfers quid pro.
Take for example trading in goods between United States and the European Union. If a firm in the European Union buys goods from United States, it has to pay in US$. It will therefore to its bank to buy US$ in exchange for Euros. The bank goes to its dealer who does the trading in Forex and places the order for amount of US$ pays the dealer in Euros and buys the US$ to enable the client to pay for the goods.
Similarly, trading in done between companies of all the nations of the world. The importers buy the currencies of the exporters in exchange for its own national currencies to pay for the goods and services. Now a situation may arise that the importers of a nation end up importing more goods and services than the exporters creating a trade deficit with one particular or multiple exporting nations. The trade deficit compels the importing nation to buy more currency or currencies of the exporting nation or nations. This compels the importing nation to create more of its own currency to buy the currencies of the importers thus leading to its currency devaluation and revaluation of the currency of the exporter.
Many people apart from the exporters, importers, banks and the dealers of Forex get involved in the trading of currencies. The revaluation and devaluation of currencies provide a good opportunity for many to make a tidy amount on the trade margins.
There are many important currencies in the world that are traded everyday. Out of those there are 8 that stand out: United States dollar, Euro, Japanese Yen, British Pound, Canadian dollar, Australian dollar, Swiss Frank, Chinese Yuan. These are most traded currencies in the world. The US dollar is top traded currency followed by Euro.
The Forex trade is decentralized and over the counter. It is open continuously for nearly 24 hours a day excepting on weekends from Sunday 22:00 hrs GMT Sydney till Friday 22:00 hrs New York.
There is high trading volume which ensures a huge liquidity.
It is closest to perfect competition as buyers and sellers have nearly all the information related to the market and the decisions are not biased. There are no central body to control the trade, nor there are clearing houses. The government however, intervenes in case of extreme pressure on the national currency.
The Forex market is a dynamic market. The exchange rates between the currencies are always changing either due to economics or due to politics. One needs to judge the present and foresee the future. The much volatility is a one aspect that provides the opportunity to gain on good bet and lose money on a bad one.
An individual would need to invest very little to enter the trading. Need for huge capital is eliminated.
The currencies are traded in pairs. For example US$/Euro, US$/ Pound sterling, US$/AUS$ and so on. One has to buy a currency that is expected to appreciate with one currency. Then the appreciated currency is sold against a depreciated currency leading to more units of the depreciated currency, thus booking profit.
Forwards and futures are a different way to enter the market. Forward deals are customizable and are executed after expiry date but the futures are not customizable and must be executed before the expiry date.
There is ample room for leveraging the investment. It means that a trader can open an account for $1000 and trade for $50,000. This high 50:1 leverage is good opportunity as well as a risk.
Some important Forex definitions one forex trader must know:
Spot rate: It is a rate quoted for immediate settlement of the transaction of the currency in question in relation to another currency, preferable US dollar or one’s national currency. The amount needs to be settled immediately or within 2 days from the date of the agreement.
Forward rate: It is a rate fixed to meet future financial obligation. It is a rate estimated on the basis of the spot rate at some day in the future. It includes interest on the spot date and other charges. Longer the time higher the interest rate. If an American exporter to Europe is supposed to get his payment of 10000 Euros in 90days, he can promise to sell the 10000 Euros after 90days at a specified rate say 1.25 dollars for Euro. This is a forward contract, as this rate is not dependant on the spot rate nor on the status of his payment, nor on the future actual exchange rate. This sale of 10000 Euros is legally binding on him.
Futures rate: Future is defined as rate of the asset/commodity at the future date that is based on its underlying value. This is also called derivative or derived deal as the value is based on the underlying value of the asset. Futures are not customizable and a traded in lots. Suppose a seller promises to sell 10000 Euros at the rate of 1.25 dollars each at the certain date. Should the seller execute the deal after the specified day, the seller must buy the 10000 Euros at what ever rate and sell those to the promised buyer at 1.25 dollars. The buyer must take the delivery of the Euros. To avoid this the buyer and the seller execute the deal before the expiry date. They only check the margins and make a profit or a loss. The futures are traded in lots. 1 micro lot stands for $1000 and mini lot stands for $10000.
Long position/short position: The trader must know if he/she should hold the long or short position. It should be decided if the currency must be bought on a long position or sold short.
Entry/ Exit: A trader must know the entry and exit points and get himself/herself acquainted about the rules.