foreign

FOREIGN EXCHANGE TRADING

If you ever travel to a foreign country you may have needed to exchange your money. If so then you’ve already participated in forex trading. Forex is the short form of Foreign exchange, Forex is a bit more than that for example, If a company buy goods from a foreign country in order to buy them they need to obtain the local currency first just like us when going on Holidays to foreign countries but the difference is they exchange huge amount.

BRIEF HISTORY

In the beginning, we had a barter system then after commodity trading and then the Coinage period. Afterward, Paper currency arrived, after world war 2 IMF was created who put out monetary policies.

Modern Day Currency System

After 1973 IMF created a system of International Currency exchange where central banks exchange their currencies between themselves. When Technology came in 1994 Countries float their currencies on market. The currency Trading system was introduced in the USA and the market opened up for anyone to trade currencies at the spot market in foreign currencies.

Forex Market is one of the biggest markets that operate around trillions per day of trading in volume. It plays a vital role in the global economy. This currency exchange is essential for international Business.

Foreign Market Participants includes

GOVT. – to implement policies they borrow or lend money give grants etc.

Businesses- for facilitating International Trade for the international payment

Investors – to speculate in changes in currency prices.

Currency Prices change almost constantly during the week because this market is open continuously from Sunday 4 pm until Friday 4 pm Central Time.

HOW DOES IT WORKS???

When you trade forex, you’re not just trading one product, you are trading 2 currencies against each other. This is called currency pair.

The Quote for a forex currency pair defines the value of one currency relative to the other. Easiest way to understand the quote is to read the pair from left to right.

INR VS US Dollar Currency pair, If the USD/INR Is trading at 70.15 it means that

1 USD = 70.15 INR.

It is similar to like the stock or commodity trading like trading stock, investors profit when they buy a currency pair and its prices increases, and investors also profit if they sell currency pair when price decreases.

forex

Suppose an investor think Europe economy is going to grow faster than US and as a result he/she think Euro will strengthen against USD. He/she can buy Euro v/s Dollar pair to speculate on his/her assumption, If the price of the currency pair increases he/she will makes money.

Conversely if price decreases he/she will face a loss.

Margin– When you trade on margin you only need to put up a percentage of the total investment to enter into a position. This amount is called Margin Requirement.

When you trade stocks, trading on margin means you’re borrowing funds from your broker. Forex trade can only be covered using funds in the investor’s forex account. Investor’s can’t borrow funds to enter a forex trade. If they dont have funds in forex account they need to transfer funds before planning a trade.

Forex margin requirement varies from pairs to pairs and size of the operation. Pair usually trade in specific quantity called Lots.

 

Standard lots = 1,00,000 units                       Mini lots= 10,000 units

Margin requirement Average is 3% to 5%.

Leverage – It enables investors to control a large investment with the relatively small amount of money. Leverage gives investors the potential to large profits and can occur huge losses too.

In terms of Financing, you are lending the currency that you’re long and borrow currency that you’re short. Investor received a credit if long currency increases interest rate than short one and vice versa . Financing will be done automatically by your brokerage firm. But However, it is important to understand the mechanism and its impact on trade.

Forex market has a unique set of risks and benefits and education is the first step to determine if this the right opportunity for you.

Firstly grab the knowledge and then jump into Forex Trading!!!

Diksha Thapa

Hello folks!!! I am Diksha Thapa, done my MBA in Finance specialization from Uttaranchal University in 2020 plus I’m NISM VA Certified eligible to give advice regarding financial plans. My life revolves around Finance as this is the domain that I’ve found my career to flourish. And that’s the reason I believe that through my articles I could provide the best information regarding financial knowledge as it is the most important for all of us to be well aware of. I hope you will enjoy reading my articles and become financially literate.

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