What is the Forex Market?
Forex market is a place where the world currencies are traded among travellers, traders, and businesses. It is the only place where every currency has a value to be exchanged with another currency to conduct foreign trade. If you buy a product from another country, then your currency will be exchanged for the currency of the country that is selling the product before you can make a purchase. In case of travelling, foreign currency needs to be exchanged with the local currency to be accepted by the locals.
Another thing to know about the international market is that there is no central marketplace for foreign exchange. Forex trading is conducted electronically over the counter. Every forex occurs via computer networks between the worldwide traders. As the prices constantly change, the forex market stays active throughout the day keep track of potential profits.
Pros and Cons of Trading Forex
The forex market has the largest trading occurrences every day around the world, which offers the most liquidity. It is easy for a trader to enter and exit a position in any currency within seconds for a small spread in common market conditions. The forex trade market opens for 24 hours for five days a week. It starts in Sydney and ends in New York. Some of the major forex trade centres are Sydney, Tokyo, Hong Kong, Singapore, Paris, Longdon, and New York.
The challenge that forex trade face is that the banks, dealers, and brokers allow a high amount on leverage. The traders can control large positions while investing only a little amount of money. The leverage ratio can go up to 100:1, which is usually normal in the forex market. Such high leverage comes with a huge risk that the trader must be aware of. Many traders have faced problems in the future by taking extreme amounts of leverages.
The new trader must understand the economic fundamentals and indicators of the market in order to make better trades. They will need to have knowledge of the economies of various countries and their interconnectedness with others. It is a fundamental which can be complex to learn.
The assets of forex trading
There are two main benefits of forex trades – You can earn from the interest rate differential of two currencies, and you can also earn profits from the changes in the exchange rates.
An investor can profit from the interest rate differential by buying the currency with a higher interest rate and selling the currency with lower interest. This strategy is sometimes referred to as “carry trade” and was used by Japanese traders before the financial crisis of 2008 when they bought British pounds because of a large differential rate.
The risk in forex trading
Forex trade can get risky if the trader does not possess the right knowledge. The interbank market has volatile regulations, and the forex instruments are also not standardized. Many parts around the world have unregulated forex trading. When the forex trade is made by banks of different countries, the banks have to determine and accept credit and sovereign risk. They use several methods to keep themselves safe, which are imposed by the industry for the protection of the participating banks.