Forex is a common term that you hear in the stock market and news channel. This might confuse you. What is forex ? If you are overwhelmed with all these terms then this article will solve the issue as we are going to discuss what is forex, brief history of forex, cons and pros of the forex and how to earn money from forex or how to trade in forex. So let’s dive right into it:-
What is forex?
Forex market is dealing in foreign currency. Exchanging currency for commerce, trading or tourism purposes. In the share market you exchange one currency to another according to the currency rate to gain profit. The currency is exchanged for foreign business and trade. Trading volume for forex was $6.6 trillion in April 2019. Forex is the most liquid market and there’s an exchange of trillions of dollars on a daily basis. There is no central place in the forex market and the trade in currency occurs in different parts of the world everyday. That’s why it is an over the counter market and now with advanced technology it is easy to trade in currency. Trading is flexible as the market is open for 24 hours and 5 days a week.
What is the history of forex?
Foreign currency has been there from centuries as people used to exchange goods and services for money. The Forex market is a somewhat new invention. More currency started to spread freely after agreement with Bretton woods in1971. Price of currency fluctuates according to demand and supply and it is administered by foreign exchange trading services.
Cons and pros of forex?
There are pros and cons for everything. Let’s discuss the pros and cons of forex and understand whether it is beneficial for traders or not.
Advantages
Low Cost
There is a low cost because brokers don’t charge anything mostly as they earn through spreads.
Suits various styles
Forex suits different types of trading styles as it is open for 24 hours and 5 days which makes it really flexible and easy for traders .
No central exchange
You can trade in the forex market from anywhere and there is no central exchange or regulator for the forex market. That’s why the forex market is an over counter to the market.
Volatile
Due to high volatility, there is a possibility to gain huge profit with level of risk. If you make a right trading decision, then there is a chance that you gain a good amount of profit.
Variety
There are 28 currency pairs and 8 major currencies in the forex market. The factor to choose currencies is timing, economic development , and volatility. .Traders who like volatility can switch currencies.
Low capital requirement
One can start investing in the forex market with a small amount because there is a tight spread in terms of pips.
Easy entry
There are indicators for short term and trading tools for long term forex which gives a variety of options to beginner, intermediate and pro level traders which makes it easy for them to enter the forex market.
CONS
Transparency lacks
As the market is decentralized so there is no one to regulate the market. This gives opportunity to scammers and brokers to manipulate the market as scammers use tricks to fool new traders and brokers to dominate the market and to create a monopoly.
Price determination process is complex
There are a lot of factors like politics and economics that determine the price of currency in the market. There is a allot of information regarding determination of price which makes it difficult to make decisions regarding trade. Forex trading happens through trading indicators mostly and it is the cause of high volatility in the market. If you have wrong technical then it will cause a loss in trade
High Leverage and risk
There is a high leverage in the forex market which means profit and loss in the forex market is amped up multiple times by capitals. You can have a 50:1 ratio in forex. Due to high leverage ,there is a chance of gaining huge profit but it can also result in a huge loss. It can result in a nightmare if you don’t have proper knowledge regarding forex, a proper capital allocation and strategy and control on emotions.
Self learning
Even though there is guidance given by relationship managers, trade advisors and portfolio managers, mostly traders have to learn by themselves and they are own their own. If you seek assistance from anyone there might be some charges for that. So to succeed as a new trader , you need to learn with self discipline and emotional control during trades. Some new traders quit in the initial days due to loss by limited loss .
Volatility is high
With political and economic events, there is a lot of volatility in the market which can cause a huge loss. If there is some problem with shares then shareholders can put pressure on regulators but in the forex market, traders can’t go anywhere. This happened in the case of Iceland bankruptcy, traders holding IcelandKrona could only wait and watch. It is difficult to keep track of prices when the market is open for 24 hours and it is hard to track the volatility so it is recommended to put strict stop losses for safety purposes.
How to trade in Forex?
- Learn about forex and terms around it cause trading without knowledge is like walking on tightrope without safety net below.
- Set up a broker account, fill all details, make payments and open a broker account.
- Before you enter the market , make a trading strategy and goal before you put money in forex.
- Start observing position in the forex market, liquidity and pending position.
- Have a proper emotional equilibrium and hold before you sell the position.
Conclusion
Forex market is a beneficial place for you if you have a good knowledge, emotional equilibrium and a good strategy. It is decentralized, volatile, full of scammers and has heavy leverage but there is variety in pairs, flexibility, low requirements, low cost and easy entry in forex which makes it a good option for traders. It’s how you look at it. Glass can be half full or half empty. Overall it’s a good asset to invest in especially for intermediate and advanced traders. There can be some problems for new traders as there are scammers and no knowledge but brokers like ROInvesting and Et finance solve this as there are video tutorials, eBooks, etc. and verified brokers.
