What is Forex?
Foreign exchange also called forex in simpler terms refers to the conversion or trading of a particular currency into another. This is primarily done for the purpose of trade or business in a foreign land. Due to the increasing needs the forex markets have become of the most liquid financial markets in the world. A very important and distinguishing feature of the financial markets is that unlike other financial markets there is no centralized market place for trading. Also the markets are open 24 hours a day and five days a week. There are various different strategii forex while trading which individuals and institutions choose one of them to make their profits.
Need of Forex Trading
Before venturing into the various strategies of forex trading it is important to get the basics right. Here the first question that comes to our mind is that why trade forex? The answer is quiet simple and can be explained by two activities. The first one is quiet simple and common when you are required to buy something in a foreign currency. In such a scenario a forex trading has to be made but this is just a small part of a larger market. A forex trading is generally done with the aim of making profits in the long run. This is done by speculating on the price movements of the currency in the market. A lot of strategii forex are employed by the traders to take advantage of the movements in the market and also minimize risks in the long run. Along with the reasons of forex trading it is also important to understand who and what kind of people or institutions are involved in the trade. Apart from the individual traders there are also many international banks involved in the forex trading with the aim of making profits. But in case of the central banks and governments the trading is done with the aim or controlling the supply of currency in their economy.
Types of Forex Markets
Depending upon the nature of the transactions the foreign exchange markets are classified into three categories. First in the list is a spot market as the nature of transaction is characterised by the spot sale and purchase of the currency. Also it is important to note that the currencies are bought and sold at the current price and the transactions are settled within two days of the deal. The rate at which the transaction is carried out is called the spot exchange rate. Then there are forward markets where the transactions are carried out at a specified date in the future. This usually occurs 90 days are striking the deal. Here the trade does not happen in actual currencies but the deal is made in the form of contracts. These contain transaction details of a certain currency type at a fixed exchange rate and a future date for settlement. The exchange rate that is agreed upon in the contract is called the forward exchange rate. Future markets are similar to the forward markets in terms of the nature of transactions and contracts. The settlements are carried out on a specified future date at a price agreed on in the contract. Out of the three the spot markets are considered to be the largest markets in terms of forex trading. It makes up to almost 40% of the total trading activity. Big companies with huge amount of funds are the ones that generally trade in the future and the forward markets.
Simple Trading Strategies
Before venturing into the field of forex trading it is very important to strategise to avoid or minimise risks. Below are some of the tips and tricks to make a profitable trade. The first and the very important strategy to trade is that one should understand there needs and have a clearly cutout goal. There are different styles of trading that one could employ hence its important that you choose the one about which you have a good understanding and it suits your needs. Once you have a plan on what are your expectations from trading its important that you stick to it. The next step is to choose a broker as he is the one who offers the trading platform. It is important to do a thorough research before choosing one as this is the first step. Ensure that the platform matches your trading style and also they provide efficient customer service.
The next phase involves setting up an account, choose one that suits your expectations. A small thumb rule or tip which could prove effective here is that always choose one with a lower leverage. If you are a beginner it is always advisable to use a mini account in the beginning to avoid losses. Another important strategy to be kept in mind if you are a novice is that always start with small sums of money and gradually increase the size of the account. Also initially the focus should be on a single currency pair as it helps you hone your skills in the long run. Trading in multiple currency pairs initially might not be a profitable idea. While not indulging in too many risks is always advisable but once it while it could be worth taking. Some times taking calculated risks might lead to bigger gains. Another important strategy is to wait for the right time as trading frequently might not guarantee you the gains. The key is to have patience and look for opportunities in the long term trends.
Trading in the forex markets has quite a few advantages. It is one of the largest financial markets in the world and due to its liquidity forex trading is a preferred choice for many. There is no limitations of place and time to trade as the markets are open 24 hours a day and 5 days a week. There is no opening bell and one can enter and exit any time. Another important advantage is that the ease with which one can carry out the trade. Unlike the stock markets where there are thousands of stocks to be analysed forex markets have a fewer currency pairs to focus on. Also the transaction costs are lower than the stocks and commodities. However luring might the forex trading be but one must keep a track of the risks involved to profit in the long run.