What is Forex Trading?
What is Forex?
Forex. You hear the term everywhere, but what does it actually mean? Put simply, forex is a global decentralised market for the trading of currencies. It is is a foreign exchange market that includes all aspects of selling, buying and exchanging currencies at current or determined prices.
If you’ve ever been to another country, you’d understand the challenge that many people since Columbus have encountered. How can you spend your local currency in a foreign country? You’ve probably seen the cash points at airports where you can withdraw a foreign currency directly from your bank, or you’ve found a currency exchange booth to exchange the money in your wallet with the currency of the country you’re visiting.
Let’s say you take a holiday to South Africa from England. You go to the airport and visit one of these foreign exchange booths. On the screen you can see that your British Pound is the equivalent of 19 South African Rand. Amazing isn’t it?
You’ve just participated in the foreign exchange market. By changing your Pound to Rand you’ve exchanged one currency for another. Or, in forex terms, you’ve bought Rand and sold Pounds.
For examples, let’s assume you exchanged 1,000 pounds for your stay in South Africa. Now you have a massive 19,000 Rand. So, you go about conducting your business in South Africa. Then, on your way back to England you decide to exchange the few Rand you have left, and you discover that the rate has changed! Now that’s surprising, since you were barely in South Africa for a week.
Welcome to the Foreign Exchange Market.
The fluctuation in the exchanges rates of these currencies is what makes it possible to trade in the Forex market.
The market is huge. It is over five trillion dollars in daily trading volume. To put this in perspective, all the world’s combined stock markets do not come close to this estimate. But what does that mean to you? Take a closer look at forex trading and you may find some exciting trading opportunities unavailable with other investments.
Why should you trade Forex?
If you’re like anyone trying to get into Forex, you may ask, “why should I trade forex?” Or other similar questions like:
- Can I become wealthy from forex trading?
- Can I become a millionaire trading forex?
- Is it worth spending time on forex trading to become a forex trader?
- Is forex trading a promising business or it is wasting time and money?
These are really good questions, and anyone who is serious about trading forex should ask these types of questions.
Advantages of trading forex
There are many advantages of trading forex. Here are a few reasons to choose this market.
The mechanics of making money online is based on acquiring an asset at a favourable price with the hope of selling it to someone at a much better price. The more volatile the market, the more people online; and, the more possibilities to find someone who is interested in acquiring this asset at your list price.
While volatility is a great factor to consider in choosing forex trading, it is the accessibility that makes it more endearing. It is easier to access forex trading than any other online trading market. From as low as $100, you can start trading forex – it is not capital intensive. And you can do it from anywhere in the world!
The innovations in the technology industry help in the release of software that makes the monitoring of real-time exchange data accessible. Software advancement also makes add-ons and plugins available to traders to automating and customising their trading strategies. Having reliable software you can count on makes it easier to trade even when you’re away from your computer, helping free up your time.
Unlike other markets like the crypto, the forex market is heavily monitored and regulated by more than one authority bodies. This makes the market safe for traders and investors.
Forex has the largest trading communities—forums and networks. As social media becomes more popular, people form forums and networks where they are able to discuss winning trading strategies, economic and technical analysis. If you’re on one of our programmes you’ll know just how important your trading community can be in helping you stay on track, pick you up when you’ve fallen off track and congratulate you on your wins.
Trading forex is exciting, educating and financially rewarding. Not only does it give you the opportunity to make an additional stream of income, but it also helps you to know more about the world you live in.
Who trades forex?
You may ask yourself, who actually trades forex? Can I trade forex? Or is it only for a particular type of person? Anyone can trade forex, however, you may have noticed that your uncle Pat isn’t trading forex; your college friends may not even trade forex. So, again you ask, “Who trades forex?”
The markets participants of forex are largely divided into four groups: central banks, commercial banks, hedge funds, corporations, and individuals.
1. Central banks:
Central banks are tasked with lending hard currency and balancing assets with liabilities, so they play an integral role in the exchange rate valuations of forex.
Each central bank plays a role in strengthening and stabilising its home currency.
By floating or pegging their home currencies, central banks can have a high influence on the forex market.
For instance, the Bank of Japan has also been intervening in the Foreign Exchange market by aggressively selling its Yen to weaken its value.
As Japan relies heavily on its import/export sector the country can’t afford to have a strong yen, so action must be taken to stop the country’s economy from sinking.
2. Commercial banks:
Ranging from international investment banks to local credit unions, when banks lend hard currencies and balance assets with liabilities.
Banks deal with global transactions every day. Hence, they provide most of the liquidity to make the big financial transactions happen.
Banks do not do much speculating. They make their money by being the matchmakers in the forex market. They use their large amounts of cash to provide liquidity for their clients to trade. The banks make commissions on the liquidity they provide.
3. Hedge funds:
These are large speculators. They are large businesses that use the market to make a profit. They are also the biggest customers of the banks as they exchange currencies to:
- finance purchases of securities denominated in currencies which they do not own,
- hedge against a risk in future fluctuations in currency exchange rates which could adversely affect their portfolios of securities, or
- simply to speculate upon such fluctuations for profit.
Big corporations use forex in their everyday business. For instance, when Toyota in America needs to order parts from their manufacture in Japan, they need to exchange their USD’s for Japanese Yen.
Hence, companies engage in forex to offset any loss they may accrue from buying items in other currencies.
The individual speculators are people like you and me, who are also in the game to make money from money. The individual speculators are the largest group of forex participants, but individuals only account for a fraction of the overall traded volume. This is because individual traders make trades with their personal money which is relatively small in terms of market share. However, individuals contribute to the overall liquidity and sentiment of forex.
Whether you plan to trade as an individual speculator or form a hedge fund, it is important to be aware of the major players in the forex exchange. The understanding of the motivations behind their market positioning will uncover potential opportunities and mitigate risk.
Do you trade Forex? Is it something that you’d like to start doing? Trading is a great way to invest for your future and to financially free yourself so you can do the things that matter most. If you don’t want to trade forex, can you still trade? Of course! You can basically trade anything, from forex to stocks, indices, commodities and shares. Choose what’s right for you and learn how to trade safely by minimising your risk and analysing the markets. What do you trade? Let us know if the comments below.
Lee is qualified at The Society of Technical Analysts, having passed his MSTA and CFTe with flying colours. To see Lee and our coaches use technical analysis, you can access our Live Trading Room 5 days a week. If you’re looking to step into the world of online trading, we’d like to help. We offer both courses and mentoring opportunities to help you trade with skill and confidence. Come along to our free Learn to Trade Live one-day course to really get your foot in the door! See here for more details and to find a date near you.