Introduction
The FX market is the decentralized international forum for the buying and selling of different currencies. It is the Forex market that determines the rate of every currency pair. Forex traders buy and sell, and exchange currency pairs at determined or current prices. The foreign exchange market is the most actively traded market in the world, and its major participants are big international banks that conduct trading in significant volumes. The FX market operates through financial institutions across the world and drives the most lucrative form of trading, that is Forex trading. Read on to find out more about FX trading and its immense market opportunities right now.
What is Forex?
Forex is short for foreign exchange. The FX market, also known as, the FX market, , that witnesses a daily turnover of more than $5.1 trillion. Forex trading takes place 24 hours a day for five days in a week. It is driven by active speculation of the direction that the currency pairs may take in the near future. Thousands of financial institutions, banks, and individual traders from all over the world take part in forex trading to rake in huge profits or incur losses based on the shifts and trends of the market.
What are the reasons to conduct forex trading?
Although raking in huge profits is the primary reason for forex trading, yet, there are several other reasons why traders choose to make a beeline for the FX market. Here are a few reasons why the FX market is the best choice for trading and making huge gains:
1. Volatility
Volatility of currency pair prices drives the trading trends in the FX market. The mechanics of volatility is pretty simple. All the trader needs to do is buy one currency with a base currency, hold on to it for a while, and then sell it when the fluctuation in the price of that one currency becomes profitable for the trader. An increase in the volatility implies an increase in the opportunity to buy and sell in currency pairs across the trading platforms around the world.
The level of volatility is almost always high and the traders can regularly expect the currency pair price to shift around 50-100 pips on any of the significant currency pairs on any random day of the week. The shift in the market results in potential gains or losses to the tune of 500-1000 US Dollar, if there is considerable trading of around 100,000 currency pairs, and the base currency is the US Dollar. The traders around the world always seek the most volatile currency pairs in the most volatile FX markets to capitalize on the fluctuation of one currency or both, and make maximum profits.
2. Technology
The grand progress in technology reflects in the sector of forex trading as well, and the software advancements of the online trading platform make forex trading easier and more profitable. In comparison to the other markets of online trading, the FX market continues to witness new technological developments on a regular basis.
Additionally, the industry of retail FX software is teeming with reliable third-party software providers who provide a wide variety of software plug-ins and add-ons to the forex trading platforms like MetaTrader 4 and MetaTrader 5. The software components almost automate the process of FX trading and make it one of the most lucrative opportunities for traders and financial institutions across the world.
3. Regulation
The foreign exchange market and trading platform is subject to the most stringent regulations and international financial laws. The whole process of forex trading including the transactions are monitored by top-tier financial authorities of the world. The regulations ensure safety and security of the foreign exchange market and trading platform.
4. Accessibility
Even though volatility is the most important factor that drives FX trade, accessibility is just as significant. It is important to know that the FX market is the most accessible market for online trading. A trader does not need a heavy capital stock to gain access to the rich and volatile FX market. Instead, he can simply open an account with a regulated FX broker platform with an amount as low and affordable as 100 US Dollar. In comparison to other financial and trading markets, the trading capital requirement of the FX market is quite budget-friendly. The trader can simply sign up with an online FX market, submit his documents, make a deposit of a reasonable amount, and start trading in the FX market.
Although accessibility does not factor in while determining the quality of the FX market, yet, it is one of the main reasons why forex trade is so popular across the world. Besides, forex trade can also be conducted through a demo trade account. Beginners at FX trading can learn about the styles and strategies without losing money by venturing into the market with the demo trade account. With the demo account, the trader can start trading and investment within only a few minutes.
5. Bonuses and promos
Forex brokers contribute to substantial surges in trading volume in the market through leverages. Due to the significant contributions of the broker the registered user receives deposit bonuses immediately after opening the forex trading account. Apart from grand welcome bonuses, the market is also replete with exciting promotional offers. The broker platforms offer numerous incentives and promos to the existing forex traders to compel them to consider whether to keep on trading and investing at the market.
6. Possibilities and opportunities
The fundamental rule of any trade is to buy when the price of the asset is low and then sell it when its price rises in order to make profits. Traders at the FX market can tweak this fundamental rule and enjoy the fruits of trading without owning any currency. This method of selling one currency without owning any is called going for the short position or short position selling. This feature of short selling is one of the reasons why the FX market is so remarkably profitable.
To top it all, one can also conduct the trade at a marginal style that implements the utilization of leverage. This leverage aids in trading at bigger amounts than the deposit made by the forex trader in his forex broker account. However, this method of short selling is not always a fruitful venture, as the long position is eventually more profitable. Even though the profits are much bigger than the deposit amount ,yet, if the trader incurs a loss, then the potential loss is huge too. ‘
A brief history of Forex trading
The forex market is the market that never sleeps and with trillions of dollars being traded 24 hours a day, the market boasts of a rich history of huge trading volume and significant financial parties. The history of forex trading and the market is elucidated below:
Trading and exchange of currencies has been in vogue since times immemorial. There is evidence of coin exchange from the artifacts of 259 BC obtained from Ancient Egypt.
The end of the middle ages witnessed the dawn of FX trading that took place over the first interconnected network of international banks.
It was in the fifteenth century when the famous Medici family of Florence established banks in foreign locations for the facilitation of trading and exchanging of currencies among textile merchants.
By the 17th and 18th centuries Amsterdam was already in charge of an active market with a considerable volume of trading taking place between the financial authorities of Holland and England.
However, the most contemporary form of forex trading began in the late 19th century.
In the United States, companies like Alexander Brown & Sons became the foremost traders in currencies in the 1850s. In the 1880s, new banks and financial institutions joined in the foreign exchange business to take part in active forex trading.
The most significant event in the history of forex trading is the creation of the Gold Standard Monetary System in the 1870s.
Prior to the first world war, there had been very little control over international trading. The economic crisis that set in after the first world war compelled the member countries of the market to dismiss the gold standard for the time being.
Between 1899-1913, the forex holdings of the traders and investors increased by about 10.8% while their gold holdings increased only by about 6.3%. Such a disproportionate increase upheld the significance of the emerging market.
By the end of the year 1913, around a half of the foreign exchange of the world was being conducted with pound sterling as the rate of exchange. At that time there were only a couple of forex brokers in operation in London. The most actively traded forex broker platforms were in Berlin, New York, and Paris.
In 1928, forex trading was declared to be an integral part of the economic sector of a country. Active forex trading began in London that somewhat resembled the style of energy of the forex trading of today.
The year 1944 witnessed the authentication of the Bretton Woods Accord, allowing a fluctuation of the currency value within the range of (+/-)1% of the par exchange rate of the currency to drive the price shifts in the market.
The Bretton Woods Accord was abandoned during the tenure of President Nixon. A free-floating currency system was brought in place that did away with the system of fixed rate of currency exchange as well.
The Bretton Woods Accord had been ineffective.The European Joint Float system failed as well resulting in an indefinite closure of the forex market between 1972 and 1973.
The year 1973 is significant in the history of forex trading as this year marked the commencement of the modern forex market. The state control ended upon the market and the conditions became preferable for relatively free market and floating market conditions.
1973 witnessed another development in forex trading. Reuters introduced computer monitors to the forex market that replaced the archaic methods of acquiring forex trading quotes via telex and telephone.
In the middle of 1980s, Reuters launched an electronic form of forex trading that served as a closed network for the forex traders based on real-time.
The forex market of today is the most actively traded online market in the world. It is the biggest financial market that trades in trillions and involves the richest financial giants across the globe.
How does Forex trading take place?
Forex trading takes place by the exchange of international currencies against one another. The currencies get traded against each other in the form of exchange rate pairs. The forex market serves as a global spot market and derivatives market that offer options, futures, forwards, and currency swaps.
The currency pair consists of the base currency and quote currency. The base currency is the first one that appears in the pair and the second one is the quote currency. The base currency indicates the amount of quote currency needed to acquire a unit of base currency. For example, in USD JPY pair, the USD is the base currency and JPY is the quote currency. The abbreviations like USD JPY and more of the quote and base currency are determined by the ISO.
The top forex trading software
There are two types of forex trading and these are manual trading and automated trading. Manual trading is the opening and closing of the trade completely manually. Automated trading takes place when the software program of the broker platform does a technical analysis of the forex market and conducts the trade on behalf of the trader on the basis of predefined exchange rate and parameters.
Also known as EAs or Expert Advisers, forex trading software can initiate and terminate the trade positions in the forex market with minimal human intervention. The software assesses the currency information, conducts technical analysis, and makes accurate trading decisions. The information provided by the forex trading software includes the analysis of currency price charts, spread fluctuations, economic events and news, and other market activities. There are tons of forex trading software applications in the industry but only a few are highly accurate and reliable. The most popular forex trading software are mentioned below:
1. Forex.com
Forex.com ranks high in the list of forex trading software as it not only provides a host of exciting features and educational tools but also enables the registered users to trade across the MetaTrader 4 platform through his account. MetaTrader4 specializes in automated forex trading and drives almost 1700 trading bots to conduct precise trading and investment in the forex market on behalf of the traders.
2. NinjaTrader
The software, NinjaTrader, is a feature-rich application that enables trading foreign exchange and futures. The platform offers more than a hundred technical indicators that automate the process of trading and make it more profitable too for the account holder. NinjaTrader also offers several resources like automated trading strategies, apps, and educational content to the currency traders. It provides free access to historical and real-time market data even without a brokerage account.
3. Thinkorswim
Thinkorswim operates under TD Ameritrade and enables algorithmic trading in the forex market. Conduct trading in forex, futures, options, and stock through only one account powered by the Thinkorswim software. One thing to note is that the platform Thinkorswim is not suitable for beginners. The minimum deposit amount at Thinkorswim is $3500 that is too high for a forex trader at the beginner’s level to afford. Thinkorswim is especially ideal for mobile trading.
4. Interactive Brokers
With more than a hundred currencies to choose from, the Scale Trader of Interactive Brokers software is fully equipped to conduct automated trading on the platform of IB. The software drives multiple systems of automated trading to suit everyone’s trading style and preferences. IB software is also available for forex trading on the go through smartphones and tablets.
Spot market, Forwards Market, and Futures markets
Individuals, corporations, and financial institutions conduct forex trading in three ways : the futures market, the forwards market, and the spot market. The spot market witnesses the most significant volume of currency trade because it is the underlying asset that forms the foundation of the futures and forwards markets. The futures market had once been very popular among individual traders and investors but the scenario changed after the introduction of electronic trading and online brokers into the forex market.
Post the advent of online forex trade there was a huge surge in forex activity in the spot market, that now surpasses the activity of the futures market. Today, the futures and forwards markets are more popular among major companies that seek to hedge their forex risks to a particular date in the future. To be more specific, the spot market is the maret that allows the buying and selling of currencies at the current rates. The rate is determined by the dynamics of supply and demand, which in turn is an effect of current interest rates, political events, economic performance of different currencies, and prediction of the future performance of currencies against one another. After the finalization of a deal in the spot market, it becomes known as the spot deal. The spot deal is a bilateral trade transaction in which Party A delivers the contracted currency amount to Party B that is the counterparty, and in turn, the counter party delivers a specific amount in another contracted currency to Party A on the basis of the contracted exchange rate.
The futures and forwards market do not conduct trading in actual currencies. Instead, these two markets conduct transactions in the form of contracts. This contract represents claims to a particular type of currency, a future date for the settlement of the transaction, and specific price of every unit. The forwards market witnesses the buying and selling of contracts over the counter between two parties, who decide the provisions of the contract. In the futures market, the parties partake in the buying and selling of futures contracts on the basis of the settlement date at the markets of public commodities and standard sizes, as seen at the Chicago Mercantile Exchange.
In the United States, the futures market is subject to the regulation of the National Futures Association. The provisions of the futures contracts provide particular details that include the dates of delivery and settlement, increments in minimum prices, the number of units that are being traded, and more. The transaction provides the details of settlement and clearance. Both the kinds of contracts are legally binding upon the parties and are typically settled for cash. The futures and forwards market provides protection to the traders from the risks of trading in the forex market.
Forex trade for speculation
The factors that have an impact on the supply and demand of currencies in the forex trade include rates of interest, geopolitical risks, economic strength, tourism, flows of trade, and more. These factors generate a varying degree of daily volatility in the foreign exchange markets. At the forex market, there is always an opportunity to make profit from the factors that may make the value of a currency rise or fall in comparison to the value of another currency. Currencies are always traded in pairs in the forex market. The essence of forex trade is that when one of the currencies in the currency pair decreases in value, the other currency increases in value, thereby driving trading based on speculation in the market.
The nature of currency as an asset class in the forex market
As an asset class a currency in the forex market exhibits two prominent features. These features are mentioned below:
The trader can earn the differential of rate of interest between the two currencies
The trader can make substantial gains from the variations in the rate of exchange
The forex investor can rake in profits from the difference between the rates of interest. The difference in the two interest rates stem from the difference in economies of the countries to which the currencies belong. The investor makes a profit by purchasing the currency that has a higher rate of interest and simultaneously shorting the currency that has a lower interest rate. A common implementation of this forex trading technique before the financial crisis of 2008 was to purchase the British pound and short it with Japanese yen, as these two currencies (British pound and Japanese yen) had a significant differential of interest rate. At the FX market, this strategy is referred to as “carry trade”.
How is currency trading possible today ?
Currency trading had once been a practice of rich multinational corporations, but, today, the doors of the forex market have been flung wide open to the average and low-budget financiers, traders, and investors. The advent of the internet established online FX trading by providing low-net-worth traders with quick and easy access to forex markets through forex brokers and banks. Most of the online dealers and brokers offer a high leverage to the individual traders and thereby enable currency trading for all.
How is the forex market regulated?
Forex authorities like the FCA (the UK), CySec (Cyprus), ASIC (Australia), Federal Reserve Bank (New York) and more regulate the FX market in the following ways:
Supervising and licensing of the FX brokers
Ensuring the compliance with segregation of the trader’s funds in the account by the broker
Monitoring compliance with the industry standards by the FX broker
Enforcing sanctions for market infractions
What are the risks of Forex trading?
Even though forex trade is quite profitable, yet, it is not devoid of risks. Be aware of the following FX trading risks:
1. Risk of exchange rate
The trader gets exposed to the exchange rate risk when there are undue variations in the currency value. The degree of exchange rate risk is based on the result of the continuously volatile shifts in the balance of international supply and demand in the FX market. Moreover, offshore forex trade is mostly unregulated, and as such, there are no daily price limits imposed on the exchanges. The market trend shifts on the basis of technical and fundamental factors resulting in the exposure of the trader to FX trading risks.
2. Risk of credit
Credit risk is the risk that occurs when there is a probability of non-repayment of an outstanding currency position because of involuntary or voluntary actions by the counterparty in the trade agreement. Credit risks generally occur to the banks and corporations that take part in FX trading. Some of the forms of credit risks are replacement risk, settlement risk, and counterparty default risk.
3. Risk of leverage
Trade collateral or deposits of low margin are policies that permit highly leveraged trading. In accordance with the provisions of these margin policies even the smallest movement in the price of a currency may cause huge and immediate losses. Forex traders should refrain from the excessive use of leverage, especially during the periods of unfavorable trading performance, to prevent substantial losses.
4. Risk of transaction
Unanticipated losses occur when there are errors in the communication, management, and authentication of the forex trader’s orders. It so happens that the forex trader also fails to seek compensation for losses incurred as a risk of transaction.
Pros and Cons of Forex trading
Pros of forex trading
1. Excellent access to leverage
Forex traders gain easy access to considerable leverage that makes them acquire quick profits from the trading and investment. At the forex market the availability of financial resources for gaining leverage is more than most of the other online fiscal markets. On the basis of the forex broker platform, the traders may even get access to margins that permit a leverage of up to 100:1 or more.
2. Easy and quick short selling
Short selling at different financial markets requires the borrowing of assets and is usually risky. However, at the forex market, through different trading platforms, the short selling of currencies is simple and low-risk. The forex traders conduct buying and selling of currencies in pairs based on the speculation of currency value without any involvement of borrowing in the process.
3. Great potential for quick and lucrative returns
The FX market has high liquidity and is one of the fastest moving financial markets. These features of the FX market combine with high leverage to enable quicker and more profitable returns from forex trading.
4. Low commissions and fees
Trading in mutual funds, bonds, equities, and other conventional financial instruments is very costly because of hidden fees and additional costs. More often than not, the cost of FX trading is determined only on the basis of bid-ask spread, that is the difference between selling and buying prices. The platform decides the bid-ask spread price and charges low fees and commissions for trading in foreign exchange.
Cons of forex trading
1. Volatility
The FX market is highly volatile. While the volatility enables the trader to make quick profits, yet, the traders also get exposed to the risk of ruin because of extremely erratic volatility that results in plunging prices and financial losses.
2. The regulatory protection is not sufficient
Trade forex takes place over the counter as there is no centralized foreign exchange market. As a result, the FX market is not subject to strong regulations unlike centralized financial markets. The forex traders need to consider whether trading is safe and then conduct a due diligence probe of the forex broker platform to ensure that the FX trading will take place in a safe and secure environment.
3. The residual return is very low
The primary objective of FX trading is to obtain quick capital gains through short position or long position from the appreciation and depreciation of the prices of currencies in a traded pair. The traders do not hold on to the currencies in order to make easy profits through consistent exchange. Such a move results in negligible residual return whenever the traders trade forex.
Conclusion
Forex trading is lucrative, flexible, accessible, and easy. However, an individual needs to practice hard, develop strategies, and be prepared for losses in order to trade successfully. FX trading is a profitable venture for those who stay abreast of market news, financier’s opinions, market analyses, currency prices, and other updates about the forex market to trade forex. Understand the fundamentals of forex trading and practice at trading and investment by opening a demo account at a regulated forex broker platform. Begin trading with a low capital and do not invest more than you can afford to lose. Try your hand at automated trading and study the market to make good profits.