What is forex?
Foreign Exchange market is a platform where the traders, businesses, and travellers trade currencies of different nations. Forex is the only platform where every currency can be valued to get exchanged with each other for foreign trade. If a person buys a product from another country, then their currency will be exchanged for the currency of the country that is selling the product. The travellers, however, exchange currencies with the local countries of the currency they travel to.
Another thing about forex is that there is no central marketplace for the trades. The forex happens over the internet and is conducted electronically over the counter. Every forex occurs via computer networks that connect worldwide traders. The forex market stays active throughout the day for five days a week as the currency exchange happens worldwide, and the value for currencies change constantly.
Benefits and Drawbacks
Forex is at present the largest trading market in the world which has the maximum trading occurrences every day as it offers the most liquidity. It is easy for a trader to enter/exit a position within seconds. Since the market opens five days a week, the trading starts in Sydney and ends in New York. The major forex trade centres include Tokyo, Sydney, Hond Kong, Paris, London, New York, and Singapore.
The drawback that forex trade faces is that the banks, dealers, and brokers allow huge amounts of leverage. With the help of leverage, traders can control large positions temporarily with a little amount of money. One can get up to 100:1 which is usually normal in the forex market. Such high leverages come with a huge risk that the trader much considers before applying for it. Traders who fail to make profits can face problem in repaying the leverages.
A beginner should understand the economic fundamentals and the indicators that help in making better trades in the market. It is difficult to maintain knowledge of different currencies and how the economies of various countries are doing.
The assets of forex
The two main benefits of forex traders are – you can earn from the interest rate differential between two currencies, and you can make profits from the changes in the exchange rates.
A trader can purchase higher value currency and sell with lower interests to make the profits. This strategy is called “carry trade” and was used by Japanese traders before the financial crisis of 2008. They bought the British pounds because of the large differential rate and sold it to make profits.
The risks in forex
Forex trade can be risky if you do not have the right knowledge about the currency market. The interbank market has volatile regulations, and the forex instruments are also not standardized for the entire market. Many forex traders are unregulated.