Forex Trading

Post on: 3 Июль, 2015 No Comment

Consider, If India exports its alphonso mangoes to the US, then what will it receive in return? any guesses? US mangoes? US goods?

No. But the Money. Some of you may have the question here that which kind of money will India receive? If it receives dollars, then what government will do with the dollars, will it circulate for the daily use with Indian rupees?

Again the answer is No.

The dollars given by US are converted into Indian rupees and then they will be circulated for the use in the country. You must be wondering that how this conversion must be done? By doing some magic tricks or printing the dollars in the rupee form.

Let me help you out in clearing this confusion.

The foreign exchange market, which is usually known as forex or FX, is the largest financial market in the world with $5 TRILLION a day trade volume.

Below is a chart from which you can get an idea of what kind of trading must be happening in the market.

What is Foreign Exchange (Forex)?

Foreign exchange refers to exchange of currencies. It is trading of currencies from different countries against each other. The FX market is the place where different currencies are traded.

What is traded in Forex market?

Nothing but the MONEY. As there is no physical buying or selling of goods, it can be bit confusing.

Think of buying a currency as buying a share in a particular country, kind of like buying stocks of a company. The price of the currency is a mirror which shows, what market thinks about the current and future health of that Countrys economy.

When you buy, say, the Australian dollar, you are basically buying a share in the Australian economy. You believe that the Australian economy is doing well, and will even get better as time goes. Once you sell those shares back to the market, hopefully, you will end up with a profit.

It is clear that it is all about trading of money, but where is the Market or the place where this trading takes place?

Hold on. There is also a concept called FOREX Market which is explained in the following paragraph.

FOREX Market

The foreign excha nge market (FOREX Market) is the Worlds biggest O-T-C ma rket or the Interbank, market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

This means that the forex market is spread all over the globe with no central location.

Forex market is the most liquid market in the World. Basically, you buy one currency and sell the other for the purpose making profit. The main goal is to make a profit when the exchange rates of the currencies traded move as per your speculation. More than 90% of all currencies are traded against the US Dollar (USD).

How Does Forex Trading Work?

Forex Trading is similar in concept to share trading that is, as a trader if you choose a currency pair, which accordingly you expect to change in value; that is if you had purchased 500 Euros in June, 2012 of cost $700 USD and after waiting for some time like 10-12 months the value has increased such that 500 Euros valued at $800 USD then you want to book profit with gain of $100 dollar.

These trades are placed through broker or market. And the process of placing orders is very easy with just few clicks. In next step Broker will pass the order to the partner bank where your position for that order is booked. When you want to come out of trade broker will close the position in the market. Thus as per market conditions accordingly credits or debits happens in your account.

Reasons of Foreign Exchange Trading

Global Business Operations

In global market today, businesses today, are operating all over the world as products or goods are transferred from one country to other countries. For that purpose, currency of countries differs for example Indias currency is Rupees and that of US currency is dollars. Hence in that case for successful trade they need to exchange their currencies.

Profit Speculation

As there are traders or the individuals who see the Forex from the profit making purposes. These people if expects one currency to rise against other then they will make trade on that currency.

Brokerage Purpose

As the institutes or the individuals trading in foreign exchange receives various prices from banks or other networks they tend to receive brokerage in trades.