Ever wondered that how so many currencies exist in the world? How it doesn’t lead to any discrepancies? Well, the answer lies in FOREX or foreign exchange market or the currency market. It is nothing to be alarmed about.
The FOREX market works like any other simple commodity market and follows the simple rules that goes with demand and supply. We can understand it better with an example. Suppose you are a German citizen wanting to buy a pencil from USA. Well you can definitely not buy it Euros can you? So you trade your Euros for the equivalent dollars and then make the purchase. This flow and quantity of currency in the market determines its price or simply equivalence to other currencies.
The trade in the market is carried out by individual brokers or financial institutions like Central Bank. You can actually trade a complete day, being working on all the five days.
Some pointers to guide you through the maze:
- Past, Present and Future:
The world went through many channels of financial institutions and also the approach of FOREX trading, but all failed. It made a shift towards a free floating system, which is devoid of any intervention. The recent expansion of internet to all the spheres of our life did not leave this market behind. Earlier only wealthy individuals or large financial institutions could actually afford to participate in the market. But now even an average Tom can participate in this venture.
Why Trade in Forex?
- Fewer rules-Like mentioned above, this market is the closest approximate to perfect competition. Thus very few rules govern it. As a buyer or a seller you have to just ensure voluntary transaction.
- No commissions- No as such commissions take authority over this market.
- No time constraint- Since the markets are open seriously round the clock, there are no time constraints for a buyer/seller to make a purchase or a sale.
- No quantity constraint- You can make as such purchase as your pocket allows!
- No barriers to entry or exit- Any buyer or seller can quit the market, as and when they want to. They can sell all their reserves to the next available buyer and leave the market without any hassle. Similarly, any new person can enter the market when they have the incentives to compete.
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3 ways of trading Forex:
There are three ways in which financial institutions, commercial banks or individuals trade in a forex market: Spot, Futures and Forwards.
- Spot Market is basically where the person trades currencies at the current price. This current price is affected by the demand and supply conditions of the currency in the market (just like any other good). But the demand and supply conditions are created by interest rates, economic performance and performance of a currency against another. The finalized deal is called ‘spot deal’.
- Futures and Forwards Market basically trade in contracts. To understand herein is an example, if I have a good X whose price I anticipate might increase in the future and my friend thinks it will fall and makes a deal with me that after one month we shall buy it at a predetermined price and have a contract. Now if the price is according to me, then I make a profit while he makes a loss, or vice versa. Similarly the currency market works in futures or forwards.
How does one make a profit/loss?
It is best to understand this concept using an example. Suppose you have $100. You exchange that for Rs. 500. Now suppose the value of dollar rises as against the rupees, and becomes $150 dollars for Rs. 500. This indicates that the rupees that you own is valued more. If you sell it now, then you can end up making a profit of $50.
Converting your own currency to another one is done in the anticipation that the value might increase in future which shall enable the buyer to make a profit by making a resale. But if the anticipation hits wrong, one might make a loss also.
Thus it is easy to understand the working of the Forex market. We can treat it as a good being traded for profit. If the supply of the good (currency) is in constraint, then you have higher value of it in the market. But if the demand falls or supply rises then the value also falls.
So what are you waiting for? Plug in your laptop and internet and enter the market of foreign currencies. The entire process is too simple even for a beginner. You just need to follow some tactics along with being observant, the rest of which can easily get easier than before. Keep clicking and rolling money in your bank account like actually never before only with Forex, the super-finance market.