Different parts of the world function on different systems of economy. Languages, currencies and finance markets are different. However, the key principles that govern economic operations remain consist around the globe. Foreign exchange (FOREX) unifies global economies. Let us take a look at what Forex signifies and its key elements.
What do you mean by Forex?
Forex is also called foreign exchange or currency trading or FX. It is actually a decentralized world trade market where world’s currencies are traded. Trade volumes exceed $5 trillion each day. This makes Forex the largest and most liquid trade market in world. Trades are made over the counter and there is no central exchange. Forex trade allows buying and selling of currencies just like stock trading. Trading window is open 24 hours a day and for 5 days in the week. Not only do you get access to margin trading but also achieve international market exposure.
What is exchange rate?
Forex is a decentralized global market that defines the relative value of various currencies. Much unlike all other markets, no central exchange or depository is present for transaction conduction. Trades are conducted across various locations and markets by various participants. It is highly unlikely that two currencies share the same value or the same comparative value. The exchange rates keep changing constantly.
What causes fluctuation in exchange rates?
Currencies are traded in open market, similar to bonds, stocks, cars, computers and other services and goods. The value of a currency changes in accordance with its demand and supply fluctuations.
- Increase in the supply or decrease in the demand for some particular currency can result in a decline in the currency value.
- Increase in demand or decrease in supply for some particular currency can result in a rise in the currency value.
A huge advantage of forex trading markets is the allowance to purchase or sell an available currency pair, irrespective of the time. If one feel Euro is about to fall in value, one call sell it and purchase dollars. If gold prices are on the rise and as per historical data, increase in gold prices has a direct correlation with the price of Australian dollar, one can sell American dollar and purchase Australian dollar. This makes the â€˜bearâ€™ market non-existential. Your profit and loss varies as per market trends.
What are the different elements of Forex?
- How to read quotes?
Since comparison is always made between two currencies, forex is cited as a pair. For instance, if EUR/USD is quoted as 1.4, it implies the relative value of Euro is 1.4 times the value of US dollar.
- What do you mean by A Lot?
- Smallest trade unit is called a lot. FXCM accountsâ€™ normal lot size for the currency is 1000 units. Trading is done in terms of integral multiples of the minimum lot size.
- What does a Pip signify?
Unit to measure profit and loss is called a pip. Most of the currency pairs get quoted up to the fourth decimal place (except Japanese currency yen). If the USD/EUR increases from 1.3019 to 1.3023, it is said to have risen by 4 pips in total.
- What is meant by Leverage/Margin?
All trading is carried out through borrowed funds. This allows one to enjoy the advantages of leverage. A leverage of 20:1 allows one to make trades with $1000 by putting aside about $50 as the security deposit. Thus, you can make the most of fluctuations in market and control more funds than your account has. Also, leverage can raise your loss.
Reasons to Trade Forex-
- Forex is always active-
Trading takes place at various times during the day in different regions of the world. Trading is available 24 hours a day for 5 days of the week. No fixed hours for trading are there. It implies that the market is active at all times of day.
- Go Short or Long-
Unlike a lot of other business markets, where selling short can prove out to be extremely difficult, in forex markets, no limitations are placed on shorting of currencies as per liquid availability. If one feels the value of a currency is about to fall, you can sell the same. If you feel the value of a currency is about to rise, you can buy it. There isnâ€™t a â€˜bear marketâ€™ in Forex.
- Unmatched Liquidity-
Since forex market undergoes trading worth over $5.2 trillion every day, a huge number of people are trading with relatively small number of currencies. This makes trading really easy.
- Global Exposure-
The world has become a globally spread out local market. Investment in other markets is subject to laws for foreign security and financial statements worded in native languages. Forex markets are a good way to invest without having to deal with such hassles.
Forex markets are a viable option to make investments in a market that never sleeps.