Trading is a process done by an entrepreneur with the desire of profit. Each trade, whether it is trading for an entity, trading for goods and services or even trading in the old barter system all leads to the ultimate destiny, profit. Forex Trading is another kind of trading where you trade currency.
Forex in a Nutshell
The Foreign Exchange or Forex or FX market simply involves the trading of different currencies around the world. Most people don’t realize this but currency value actually plays a very major role in regulating their internal as well as external economic situations. To quote a simple example, imagine you are living in the US and wish to buy some cheese from Italy. In this case the payment for the cheese would have to be made in Italian Lira or Euros. So, this means that the importer in the US would have to pay the corresponding value of the cheese that you pay in US Dollars in the respective Italian currency to their partners in Italy. This is a basic example of a Forex transaction.
A very unique aspect of the Forex market is that no central markets exist for facilitation of Forex transactions. Forex trading is always done over the counter electronically through computer networks. The market is open 5 and a half days a week for 24 hours straight. Currencies are constantly traded in the major financial centres of the world such as London, Tokyo, New York etc. The Forex market is highly active all the time as when a trading day ends in the US, the time difference means that it will immediately commence in Japan at the same time. This causes prices and rates to be very dynamic and ever-changing.
Forex is generally traded in currency pairs. Some of the popular ones include USD/EUR, USD/JPY, GBP/USD etc.
Factors influencing Forex
Forex rates are influenced by numerous geopolitical factors such as interest rates, tourism, trade agreements, conflict, industry development etc. Based on these factors, currency values increase or decrease with respect to the other in that respective currency pair. While there is no set standard as to how much each factor would influence currency rates, investors speculate if a currency will strengthen or weaken against the other based on these factors.
Risks with Forex Trading
Trading with currencies can hold a significant amount of risk and complexity. Interbank trading for forex often runs of different degrees of regulation, in which the trading instruments are not standardized. In many countries of the world, the Forex trading mechanism is almost entirely unregulated.
Since the Forex market is run by placing bids on currency, it is heavily influenced by supply and demand. Because of the massive volumes in the case of Forex trading, it becomes very tricky and difficult to predict which direction the market will take, It is very necessary to take into account a holistic view of all the factors influencing currency rates.
Forex trading makes for a lucrative option for traders with limited funds to invest into the market. Forex is particularly beneficial for day traders considering how the market is active almost all the time unlike other commodities. That said, it can also be beneficial for larger traders with high volume of capital to invest considering how Forex is the biggest market in the world in terms of capital traded. The complexity of assessing the various factors involved and how they will influence the market certainly does exist. However, a little focus and understanding given to fundamental macroeconomic concepts will certainly give you an edge in analyzing Forex trends and becoming successful in the market.