There are ample business opportunities in the financial market if one has sound knowledge of the same. Among the top options one can count forex which is trading between various currencies. Forex trading deals in foreign currency and its exchange. It is a process in which one currency is changed into another through buying and selling for different reasons. The reasons include commerce, tourism, trading etc. This form of trading is done for some practical reasons, but generally it is done to earn profit from trading.
In this form of trading,two currencies are required known as currency pair. The trader predicts the currency movement in both the sides whether buying or selling. Forex trading requires lot of capital, with the facility of internet a retail market has been put forth keeping in view the individual traders. This market provides easy access to foreign exchange market either through banks or brokers making a secondary market. A large trade is controlled by small account balance by online dealers and brokers.
Benefits of Forex trading:
Before going for a trade in this market one needs to know the benefits and limitations of the trades and probable risk in any segment. The traders who have sound knowledge can have better options of earning in this market. Forex trading offers trading in a market in which trades are carried out in different currencies across the financial market. It is the largest market of trading currencies that offers high liquidity. The forex market operates throughout the business week for 24-hours a day. There are 60 traded currency pairs that are popular and the choice is offered between them. Profit can be earned from both long term and short term selling of currencies. One can easily get more return on minimum investments. The trading system of currencies is centralized as well as transparent.
Process of trading Forex:
The professional traders are attracted towards Forex trading to expand their trading portfolio while for beginners it offers smooth trading experience. Forex trading always involve currency pair, the base currency that is listed and the second one quoted currency. Price of a currency pair equal how much one unit of base currency worth in the quote currency. Market factors affect the expectations of increase or decrease in the value of the currency. These factors are economic events, news and trading strategy. When the base currency increases the right move is to buy as the quote currency will decrease against it. This leads to profit as there is increase in exchange prices. While currency is sold when there is a decrease in the value of base currency against the quote currency.
Currency Categories under Forex:
The currency listed is in the form of three-letter codes in each pair, the first two letters refer the region of the currency and the third letter is the name of the currency. For example, GBP/USD indicate buying Great British Pounds and selling of US Dollars. Currency pairs can be categorized as Major Pairs – this includes seven countries and their currencies including 80% of Forex trading, like USD/JPY, GBP/USD, EUR/USD, USD/CHF, USD/CAD, AUD/USD and NZD/USD. Minor Pairs – the currencies uncommonly traded and include major currencies against each other except US Dollar, like EUR/CHF, EUR/GBP and GBP/JPY. Regional pairs are classified by regions such as Australia or Scandinavia e.g. like AUD/NZD, EUR/NOK and AUS/SGD. Exotics is when a major currency is paired against an emerging economy, like USD/PLN, GBP/MXNand EUR/CZK.
Types of Market:
Forex market is a market operated at global network of banks. There are four trading centres in different time zones: New York, Tokyo, London and Sydney. One can easily trade Forex at any time of the day as there is no central location. There are three types of Forex market.
First is Spot Forex Market-the trade of the currency pair takes place at the exact place where physical exchange takes place within a short period of time that is on the spot. In spot market currencies are bought and sold according to current prices. The spot market is known as one that deals in present transaction; these traders need two days for settlement of trade.
Second one is Future Forex Market- this type of exchange of currency has a type of contract that is legally binding. A contract is made to buy or sell an amount of currency specified at a certain price that is to be settled at a date planned in the future. Future contracts have specific details that include number of units being traded, delivery as well as settlement dates and minimum price.
Last one is Forward Forex Market- it is a contract to buy or sell an amount of currency specified at a set rate that is to be settled on a set date or in a range of dates in the future. Generally future and forward Forex trading is done my big international companies. As they expect and foresee future exchange rate fluctuations and appoint speculators to take part in the market.
Pros of Forex Trading:
The daily trading volume is very large in Forex trading; therefore, it offers the most liquidity. The trading of currencies can be done 24 hours a day and five days a week –with start of a day in Australia and ending the same in New York. The major centres of trading are Hong Kong, Singapore, Tokyo, Sydney, Frankfurt, London, Paris and New York. New Forex traders can become more profitable by focusing on understanding the fundamentals related to macroeconomics that affects the currency values and its technical analysis.
Cons of Forex Trading:
While trading in currencies one must understand the leverage and risk associated with it. Banks, brokers and dealers in Forex market put high amount of leverage and with little money traders can control large positions. Extreme leverage has led many leaders towards becoming insolvent.
The currency trader must have bigpictureso as to understand the economies of the various countries and their inter-connections that affect the currency values of those countries. Trading currencies require the understanding regarding the economic fundamentals and indicators.