Understanding Of Forex Trading

Understanding Of Forex Trading

Today, there are more than 180 legal currencies in the world. Every moment there is foreign currency transactions happening which can be understood from a very simple example like, if we visit the United States, then we exchange our currency with USD (AUD/USD: ~0.72 as on 1 Feb 2019, 8:29 am UTC) to make any transaction during our stay, and similarly when on our return we exchange USD with our currency. Everyday transaction of $5 trillion is happening which is more than all combined equity and futures market.

Due to demand and supply of currencies, foreign exchange changes all the time. Today a robust network of online platforms has provided convenience to people as currency exchange can be done while sitting at home even from our smartphones.

There are few of the currencies which are easily convertible and tradable, especially the currencies of the developed economy. Famous currency pairs are known as “majors” which are EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD and NZD/USD, then there are currency pairs without USD and are popularly known as “minors” or “crosses” which are EUR/GBP, EUR/JPY, GBP/JPY, NZD/JPY, CAD/CHF, AUD/JPY,  and lastly there are “exotic” pairs which are the combination of “major” and currency from emerging economy, such as USD/TRY, EUR/TRY, GBP/DKK, USD/INR etc.

Forex market is a decentralized market spread across every part of the world with a huge amount of transactions between various banks, institutions & non-institutions and retails. We broadly define this market into two categories, interbank market, and OTC (Over-the-counter) market. Interbank market involves transactions between banks and banks, banks and institutions, and institutions and institutions for the purpose of payments, hedging, balance sheet adjustments, etc. whereas in OTC market retail such as individuals, HNIs/UHNIs, brokers, etc. trade or exchange their currencies either to speculate or make visits to foreign places.

In forex trading, the commonly used term is “pips” and “spread”. One pip is equivalent to 1 unit movement of the 4th decimal place, for example, EUR/USD today is 1.1400 and let say tomorrow it becomes 1.1401, there is an increase of 1 pip which is 0.0001. Spread is the difference between “Ask” price and “Bid” price. “Ask” price is the minimum price at which0 the seller is willing to sell at, and “Bid” price is the price at which buyer is interested in purchasing. The trading is done 24/5 starting from Monday in Asia to Friday in America in four sessions which are Sydney session, Tokyo session, London session, and New York session. The most important feature which makes forex trading lucrative is the ability to leverage up to multiple times, for example, various brokers provide you the margin limit of 400 times on your investment on selected currency pairs which means with $100 of investments, one can take positions up to $40,000.

Important points to remember while forex trading:

  • It requires a certain level of skill sets which can be acquired after practice
  • Most common practices followed are understanding Technical Analysis and Fundamental Analysis to estimate currency trends
  • Exotic currency pairs lack liquidity, so position size should always be taken care of
  • Leverage is boon and bane at the same time if not utilized under money management strategies
  • Beginners should always consult trading experts before taking it as a full-time opportunity.

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