The word ‘forex’ (FX) has been derived from the combination of foreign currency and exchange. Foreign exchange refers to the conversion of one currency into the other for a host of reasons. It can be done by forex trading and is known to be profitable in the long run. However, this act can be both risky and complicated at the same time. It is due to the fact that trade flows in the system and it is difficult for a single trader to have an impact on the price of the currency. Since the whole process can be tricky and convoluted, we thought to bring you an explanation to understand the same.
The Forex Market
The foreign exchange market is the one where several currencies are available for trading. For anyone in the world, currencies are vital since they enable one to purchase goods or services both domestically and across borders. The exchange of global currencies is important in order to carry out foreign trade and business operations. We will now explain how the scenario of forex trading works.
If someone lives in the United States and wants to buy a dress from France then they themselves or the company they have been making the purchase from needs to pay for it in Euros (EUR). This implies that the importer in the U.S. needs to exchange the U.S. Dollar to acquire EUR of the value that the dress is for. This is a simple example of foreign exchange concerning the USD/EUR pair.
The forex market is not a centralised one and does not have a central marketplace for the trade to take place. The currency trading is carried out on an electronic basis over-the-counter (OTC). This signifies that all such transactions occur through the computer among traders from all over the world. The market is open 24 hours a day as every country’s time zone is different and if one single zone is given the priority it won’t be fair to others.
In the past, banking institutions used to take care of the forex trade activities that people carried out. However, now it has become a retail-oriented domain wherein everyone undertakes their own investment activities and a lot more participants have entered the domain in recent years. Forex trading in India has been made easy due to several factors which include the popularity of forex trading app options in the country. These apps for forex trading enable one to make investments in the foreign currency exchange market with a few simple steps.
Foreign exchange is not as simple as it looks. Since there is no single marketplace designated for the same, people need to use forex trading apps that have come out in recent times. Moreover, since there is no physical venue for the market there is a string of connections that is executed to carry out a single transaction. Once the order is placed through a forex trading app then the connections between trading terminals and computer networks come into play to complete the transaction.
The forex market is considered to be the opaquest financial market as it lacks even basic transparency. Since currencies are being traded in OTC markets, people don’t really have to make any disclosures about their trade or the stake they hold. Institutional and investment firms are known to hold a large pool of stake in the currencies, which is one of the prominent features of the market.
Moreover, traditionally it was thought that the country’s economic conditions would be the most important deciding factor in determining the price of a currency. However, a survey that was conducted in 2019 stated that the price of a currency is majorly impacted by the motive of such institutional investors. It implies that though the market is not volatile enough, even the smallest change can be induced by firms that are known to hold a larger stake.
Forex trading can be one of the best opportunities for those who do not want to make riskier and fluctuating investments. However, people should also remember that one single investor does not have much power to influence the market while those who are holding a significant amount of stake can literally alter how the market looks in a couple of days or months.
Venues Of Forex Trading
There are three prominent venues through which forex trading operations are carried out. They are spot, futures markets, and forwards markets. The largest of all three mentioned here is the spot market. These have been discussed below.
- Spot Market: It is the largest forex trading venue as the biggest underlying real asset is traded on this venue for the forwards and futures markets. Earlier, the trade volume of forwards and futures markets used to surpass that of spot markets but over time the situation reversed due to the emergence of electronic trading modes.
- Forwards Market: A forward contract is referred to as a private agreement that is signed between two parties to acquire a currency at a future date at a pre-specified price. In the forwards market, contracts are traded over-the-counter and the agreement is formed by clauses set by themselves.
- Futures Market: A futures contract is defined as a standardised agreement between two parties to get the delivery of a currency stake on a future date at a pre-specified price. In the futures market, contracts are traded according to a standard size and settlement date that is noted on public commodities markets.
Why Is The Forex Market Useful?
Forex trading can be beneficial in many ways but the two prominent ones have been discussed here:
- It can be used to hedge the losses that could be incurred by doing business in foreign countries due to the risk of changing rates. Trading forex enables one to fix a price at which the transaction would be completed to deter losses.
- It can also be used to speculate the price of a range of currencies. For instance, things like inflation affect a currency’s price. If one assumes that the price of that currency would go down in future then the other currency in the pair would automatically gain in value. This can be used by forex traders to earn profits.
Is Forex Trading Legal In India?
Well, ‘is forex trading legal in India’ is a question that new traders would like to know about. Therefore, we picked the question to discuss the concept in brief. So the answer is that it is legal in the country. Anyone in India can trade in different currency pairs using forex trading apps that are available in the market. However, if the query ‘is every app for forex trading legal in India’ is considered, then the answer changes. Not every app for forex trading in India is legal. There are a host of legit apps that should be researched on and used since the wrong unregulated or unlicensed platforms might lead you into trouble.
How To Trade In Forex?
Trading forex is quite similar to equity trading though the rules and implications for both vary a little. To get yourself started with trading in forex, here are some steps that you must follow.
- Know about forex: Every domain should be known about without entering into it. So, we recommend that you read up more on trading forex and how it works. Information on different currency pairs is also important and should be kept track of.
- Set up a forex trading account: Select any forex trading app after researching about it and ascertaining whether it is legit in your country or not. Then sign-up according to the procedure that is mentioned. There is no trade commission so keep a note of it and don’t go for platforms that charge it as they might be fake. These brokers earn through spreads (also known as pips) between the buying and selling values.
- Pick a trading strategy: One needs to choose one of the prevalent forex trading strategies or formulate their own plans. It is not always in their hands to predict market fluctuations, which is why they should have broad guidelines and a proper roadmap for trading. Take into consideration your budget, motive, and the amount of risk you can go for.
- Keep a track of numbers: After making an investment you can just sit comfortably. You need to constantly keep a check on your positions, and that is an essential part of forex trading.
- Have control of emotions: It is possible that after witnessing a change in the market you are impulsive to make the next trade. However, it is crucial to maintain your poise and make investment decisions only after proper analysis and scrutinisation.
Strategies For Trading Forex
The various strategies that can be used for trading forex have been noted here.
- Scalp Trading: It refers to the positions that have been acquired for seconds or minutes to earn profits through spreads or pips. Profits are calculated on a cumulative basis as after a number of trades are performed during the day, the actual amount of profit or loss is determined.
- Day Trading: It is a short-term forex trading strategy that involves acquiring and exiting the position on the same day. Profit or loss is determined by the change in the price of the concerned currency pairs during the day.
- Swing Trading: This strategy refers to the one where the trader purchases a position and holds it for more than a day, that is, days or weeks and then exits it to square off at a profit.
- Position Trading: It refers to a long-term forex trading strategy where the trader holds the position for months or sometimes even years. This type of undertaking needs better fundamental analysis skills to make the right decision.
A Learned Closure!
Forex trading can be one of the trickiest undertakings to understand as the market does not work according to what a single trader wants. A number of factors affect the trading price of currency pairs that include influence from institutional and investment firms along with economic parameters like inflation. However, with proper knowledge of the domain, one can surely ace the race and earn desired profits. Therefore, we encourage you to research more on the topic to grasp the concept better before making your first trade.