What is Forex Market
The forex market has continued to be the leading most liquid financial market, and it prides itself with a daily capitalization of over $4 trillion. Forex stand for Foreign Exchange and it defines the place where private investors or individuals, corporate firms, financial houses and national conglomerates make profit off the differentials in Forex rates. Currencies normally are traded in pairs. Each currency is paired against another currency and at all times will have a price which is termed the Forex rate or simply the price. If you’re trading the Euro and the US dollars and there is a simultaneous fall in both currencies of around 10%, this will mean that you are on the same spot as you initially were. There will be virtually no loss if you employ either currency in the purchase of the other, hence their ratio remains the same.
Profit making is the main objective of the Forex market. The Forex market exposes market participants to high risk as well as high yields. Anybody can take part in the Forex market from anywhere in the world, either personally or with the aid of a Forex brokerage firm. It is a highly sophisticated marketplace.
With advancement of the internet, we have seen a new dimension to the forex market as we become more familiar with our vast trading experience. At the same time, an increase in automation in the entire process of trading has increased our profits tremendously. A very good knowledge of the market is vital for anyone who wishes to become a professional trader.
A number of market participants are able to multiply their money in days, sometimes hours, as a result of the rapid fluctuations in the Forex market. In the same scenario, it is also possible to lose all your cash in a short period of time.
Hence, it is wise that a participant speculates with disposal funds. This implies that even if you lose all your money in trading you are still financially sound. Sadly, this advice is disregarded by a lot of investors or new comers in their trading venture.
Fundamentals of Forex Trading:
It is an absolute requirement that an investor must possess some background knowledge on Forex before he/she starts his trading venture. An investor must learn the fundamentals of Forex to understand what drives the market that produces price fluctuations.
With the market trading round the clock, it may be difficult to take part in trading activities especially during the early hours of the day. During times like this, it may be possible to earn profits. Hence, automation of trade is critical and this is the ideal solution for almost all investors.
A robust, time tested and reliable Forex ‘robot’ can be of great help in optimizing profits by measuring the market’s peak and bottom and entering and exiting profitable position on your behalf.
Whether you are a newbie or a professional the Forex market can be aggressive, punishing, harsh, merciless as well as gratifying and rewarding. Receiving tips and guidance from a seasoned Forex broker will be of enormous help rather than going it alone. Criteria for an invaluable Forex broker is the provision of an efficient support line, offers competitive spreads and the broker must be legitimate and licensed.
How to Trade the Forex Market?
There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forward market and the futures market.
The forex trading in the spot market always has been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.
What is the spot market?
More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.
What are the forwards and futures markets?
Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.
In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.
In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market.
Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.
Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.
(Source : Investopedia)
