In simple terms, forex trading, is the currency trading. It is one of the most liquid and traded financial markets in the world, with transaction volume exceeding $ 5 trillion every day, globally. It is interesting to note that if we combine the stock market assets across the globe, the forex market would be quite larger than that volume. Foreign exchange offers a wealth of opportunities for those who can take advantage of movements in currency prices.
In this article, we will have a detailed look at forex trading and several aspects related to it.
Forex trading, currency trading or foreign exchange trading refers to the purchase or sale of one currency in exchange for another in order to earn a profit. It is a decentralised global marketplace, which is increasingly popular for investors as well as speculators, as individual investors, businesses, financial institutions and central banks all participate in it.
US Dollar – The Global Dominant Currency
For decades, the US Dollar has enjoyed the status of the de facto global currency. Other most popular global currencies are Euro and Chinese Yen. Worldwide, nearly 90% of forex trading occurs in the US Dollar, which made up for nearly 62% of all the known central bank foreign exchange reserves, as of Q3 2018. While, during the reported period, Euro accounted for 21% of the known central bank foreign currency reserves and emerged as the second closest reserve currency in the world.
Types of Forex Market
Below are the three different types of the forex market:
- Spot forex market: It is the place, which involves the purchase and sale of currencies at the exact point the trade is settled. In this type of the forex market, supply and demand determine the price, which reflects economic performance, current interest rates and ongoing political issues. It is the most popular type of forex trading market, backed by technological advancements and increasing number of brokers. Moreover, the other two types – forward and future – are based on the spot market.
- Forward forex market: This forex exchange category involves a contract between two different parties for the purchase or sale of a set amount of a currency. The transaction at a specified price gets settled at a date in the future.
- Future forex market: In the future forex market, two parties reach a contract, which is legally binding. The contract involves the sale and purchase of a given currency at a set price and date in the future.
Benefits and Challenges of Trading Forex
While choosing a market to trade, traders look for the best chance to make a profit and that is achieved when the trading conditions are optional. Here are the top benefits of forex trading that make millions of traders interested in this segment.
- Market hours: Currency trading market is open 24 hours a day, five days a week (from Monday to Friday), thus giving the opportunity to buy and sell as per the schedule.
- High liquidity: As mentioned in the beginning, it is the most liquid market across the globe. A huge number of buyers and sellers are engaged in trading in this market at any given time. The forex trading market gives the ability to trade huge amounts of volume in and out of the trading markets.
- Leverage: Leverage in forex trading means that by making a small upfront payment of the complete value of the position, one can open a position on the forex trading market. Leverage lends itself to quick profit and loss, hence it is often referred to as double edged sword.
- Trading opportunities in a wide range: With forex trading, traders get the opportunity to trade varied currencies, factoring in primary changes in economies and global events.
Currency trading is also very risky. Thus, understanding the risks involved with forex trading is imperative.
- Difficult to predict: Foreign exchange market is extremely difficult to predict, as a number of factors impact exchange rates.
- Price risk: Since long-term and short-term demand and supply determine currency prices, prices are difficult to predict.
- Investment risks: Investors face significant investment risks in the currency market, owing to currency fluctuations, which might result in losing money. Exchange rates are volatile, albeit not as volatile as other asset classes.
- Leverage risk: As previously mentioned, foreign exchange products are highly leveraged, thus it can lead to large losses quickly.
- Rate risk: Any change in the interest rate of different currencies can impact exchange rate and trading prices.
What Influences the Forex Market?
Central Banks: Decisions made by central banks are important in forex trading, as their measures reflect the economic state of a country and impact its future economic growth. Their announcements have a significant impact on the price of their currency, which in turn influences the currency trading market.
Market sentiment: People perception towards how a currency is performing and how it would perform in the future have a major impact on the foreign exchange market. If traders believe that a certain currency is moving towards a certain direction, they make their trading decisions in line with that. Moreover, they also convince others involved in forex trading to follow the same, which as a result increases or decreases the demand.
Geopolitical scenarios: The stability of a country is directly reflected in the trading pattern of its currency. Events such as elections, war, inter country turmoils, inflation, GDP numbers etc, all these factors have direct impact on the country’s currency. These factors determine as to how conducive the economic environment is for the local as well as the global investors. Furthermore, some countries do not allow free trade of their currency and hence are not valued based on the market demand and supply but rather on the government moves.
How Forex Trading Impacts Companies?
Forex market could be considered as the backbone of international trade, in several ways, owing to the fact that major as well as minor currencies are traded on this platform. Thus, exchange rates have a positive as well as negative impact on businesses across the globe. Businesses have exposure to foreign exchange markets, as several times they have to send or receive a foreign currency from or to their business partners.
For businesses engaged in imports and exports, foreign exchange rates play an important role when they are required to make payments to their workers, suppliers and logistics partners. Even for domestic companies, forex market is important, as it can have an impact on the price of production, construction, etc. Additionally, businesses that borrow or lend money, from someone in a foreign country get affected by exchange rates.
Businesses can get affected by a number of ways including liquidity, credit, translational and transactional risks by currencies. Sales forecasts along with increase or decrease in payments get influenced by any impact on currencies.
Forex Trading in Australia
In Australia, forex trading is highly popular among individual investors and international traders. Traditionally, forex trading services were provided by a broker, however, with the advent of internet, several investors opt for online trading to take advantage of forex price movements. In Australia, a broker is required to be authorised by the Australian Securities & Investment Commission (ASIC) to perform foreign exchange trading. The commission, which was founded in 1998, is the financial markets regulator in the country.
Let us now look at some of the major brokers engaged in forex trading in Australia.
- Pepperstone Group Limited: Headquartered in Melbourne and founded in 2010, Pepperstone is one of the fastest growing forex brokers in Australia. It is an ASIC and FCA-regulated broker, trading in FX, CFDs and commodities.
- FXCM Australia Pty. Limited: FXCM Australia, part of Leucadia, is a leading provider of online FX and CFD trading solutions in Australia. It a privately-owned company, founded in 2002 and located in Auckland, New Zealand.
IG Forex Trading: IG Forex Trading is one of the largest retail forex and contracts for difference (CFD) providers in Australia. The broker, which was founded in 1974, trades in contracts. The Australian Securities and Investment Commission (ASIC) regulates the broker. It is also one of the founders of industry body Australian CFD & FX Forum.
- Saxo Forex Trading: Giving access to forex currency pairs and share market CFDs, Saxo Forex Trading holds an Australian Financial Services Licence. The Australian Securities and Investments Commission (ASIC) regulates the company’s Australian subsidiary Saxo Capital Markets (Australia) Pty Ltd., which operates from Sydney.
- Plus500 Forex Trading: Plus500 Forex Trading, which is a leading provider of Contracts for Difference (CFDs) and forex trading solutions, has an Australian subsidiary, named Plus500 AU LTD, which has an office in Sydney. The Australian subsidiary is licensed by the Australian Securities and Investments Commission (ASIC).
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