Forex trading continues to be popular because it serves as a means of exchanging fiat currencies of different countries, as well as an avenue for earning a regular income. While Forex has the potential to make one rich, it can also be a conduit to lose one’s life savings in a twinkle of an eye, if things are not done correctly. Here is your proper introduction to Forex Trading.
What is Forex?
Forex is the global market that permits one to trade a pair of currencies against each other. The foreign exchange market is rated as the largest financial market in the world, which is commonly referred to as “Forex” or “FX,” market.
The FX market is a global, devolved market wherein the world’s major currencies change hands. While the Exchange rates are not fixed; they change by the second, making the market continually in flux. An exchange rate is defined as the comparative price of two currencies from two different nations.
The FX market is open throughout the day, 24 hours for five days in a week, only shutting down during weekends. A typical Forex day commences when traders wake up in New Zealand (Wellington), and then to Australia (Sydney), Singapore, Hong Kong, Tokyo, to the European market: Frankfurt, London, and finally American market before trading resumes again in Wellington!
Short History of Forex
The earliest means of exchange is the barter system which began in 6000BC. In the barter system, a particular good was exchanged for another. In due course, in the 6th century BC, gold coins were used as a medium of exchange (currency). Due to their heaviness, countries embraced the gold standard, which later created the framework for the Foreign Exchange market. Nations traded with each other as they were able to convert the currencies they obtained into gold.
The first, foremost revolution of the forex (foreign exchange) market, the Bretton Woods System, happened toward the expiration of World War II. The Bretton Woods Accord was agreed by world powers to develop a stable atmosphere by which global economies could reestablish themselves. The US dollar was fixed to gold. As a result, foreign countries would transact in the US Dollar, thus, creating a promising Foreign exchange market.
In 1971, American President Richard M. Nixon terminated the Bretton Woods system, which later led to the free-floating of the US Dollar versus other foreign currencies of the world. In the same year, the Smithsonian agreement tried to fluctuate the currencies but failed and formally switched to the free-floating system of foreign exchange.
Spot Market and the Forwards & Futures Markets
The spot market is the market wherein financial instruments, such as currencies, securities and commodities, are traded for instant delivery. Also known as cash market, it is where the exchange of financial instruments close deals immediately. Currencies and Stocks are the most renowned spot market instruments. While Nasdaq and Forex are huge global spot markets.
On the other hand, the forward market is an over-the-counter marketplace that fixes the price of an asset or financial instrument for future delivery. Forward markets are applied for trading a variety of instruments; however, it is mainly used for the forex market and not excluding commodities, securities and interest rates.
A futures market is that kind of market where investors buy and sell contracts for delivery on a specified date in the future. It comprises various instruments such as currencies, commodities, stock indexes and select stocks.
On the futures markets, financial instruments are also referred to as derivatives, since the pricing of the contracts is dependent on the underlying safety in the cash market.
Reasons Why Forex Trading is Easy Today
The Internet and computer revolution are the significant reasons why forex trading is simpler today. As analyzing the market is much easier now due to the proliferation of computer software-based indicators, which go a long way in accurately analyzing the markets.
These days, Internet-supported Trading charts can be used by anyone on the computer or with smartphones to place desired trades. News and information which influence price movements are easily accessible due to liberalization created by the Internet.
Advantages and Challenges of Forex Trading
It is enormous; being about 200 times larger than the New York Stock Exchange (the largest in the world). It’s an excellent opportunity for more income.
It is frequently traded in different markets of the world 24 hours a day, Monday through Friday. So, a trader is at liberty to trade any market that is suitable to him.
Challenge For Traders
Unstable Leverage & Proper Knowledge
Fluctuating leverage can be an undoing of a trader as brokers continue to find the best fit for them and their clients. Proper knowledge is what every trader must be armed with to succeed; hence, the need for proper education before trading live.
The forex market is the busiest in the world and the most liquid. For one to trade it and make reasonable profits, a requisite knowledge of the different analyses and money management are very crucial elements.