{x} | Trading.live

Forex is simply the Foreign Exchange; it is the act of converting a certain currency into another. Forex trading is practiced daily globally for tourism, commercial needs, and import/export operations. The average daily forex market volume is roughly $5 trillion.

As the pandemic hit the world, online trading was boosted and showed significant growth.

The forex market is decentralized, which means that there is no physical center for it and trades occur around the clock and over the counter. Forex is the act of transferring currencies between individuals at a set price. The forex market is available 24 hours from Monday to Friday, and it has 3 sessions: Asian (Tokyo), US (New York), and European (London).

History of Forex:

Exchanging money did not occur 100 years ago, however, exchanging currencies has been there for thousands of years ago. One of the oldest exchanges is the Chicago Board of Trade which started in 1848 and allowed trading commodities such as wheat and corn helping farmers and consumers eliminate the uncertainty in prices. As of now, the Chicago Board of Trade is one of the most popular and biggest in the world offering a wide range of products.

What are Spot, Forwards, and Future Markets?

There are different ways of trading forex, the first, largest, and most important is spot trading. Spot trading involves the direct exchange of one currency for another, an example of this is when you exchange 1 Euro for 1.2 USD. However, at a certain time, the futures market was the most popular when it offered traders the ability to transact long before electronic trading on the spot market became available.

The spot market is when currencies are bought and sold at a given price at the current time. Prices are affected by economic conditions, supply, demand, interest rates, and politics. The transactions in the spot market are cash-settled and immediate, but settling trades takes two days.

Forwards and Futures do not exchange currencies, but they represent a claim of a certain currency at a specific price and future settlement date. The forwards market is made up of contracts that are bought and sold between two parties with a predetermined set of terms between them. This is done over the counter while in the futures market which is an exchange-based market, contracts are bought and sold using a standardized size and settlement date. Future contracts include further details such as the delivery date and minimum price movement.  

Advantages and Disadvantages of Forex Trading

Any market an individual enters carries a certain amount of risk. One of the risks involved in forex trading includes the use of leverage that magnifies profits and losses. Leverage is simply a multiplication of your current margin by a certain amount (X50, X100, X200) that allows you to place an order at a value of your margin multiplied by the leverage. Another risk involved is going into the market without analyzing what is happening in the market, thus reducing your chances of success.

Leverage is very dangerous to an amateur trader, as the account is highly at risk. Leveraging is tempting since it allows you to go with big positions at a smaller required margin. Most traders go all in when they have a small margin, taking the chance of making loads of money in a short time, but most of the time they end up liquidating. Many brokers offer up to 1:500 leverage which is very risky, in simple terms, if you deposit 1000$ you can trade for a value of 500,000$.

On the other hand, the forex market provides you with full control over your money which is mobile-friendly. A trader can make money wherever he is, at any time he wants without the struggle of having a company and employees. A trader is a one-man company.

How is Forex Traded?

The simple answer to this is when trading forex, you can do whatever you want in terms of buying, selling, stop loss, and take profit…etc. There is no one direction, as well there is no right and wrong way of trading. But to simplify this, traders are divided into several sections including short-term traders and long-term traders. Short-term traders are the one that enters and exit the market in a short period of time to secure a small amount of profit. Long-term traders hold positions for weeks if not even months to secure a larger amount of profit.

Factors that affect the way a trader trades are the trader’s risk tolerance, the trader’s goal, and what they really want. Some traders trade fundamentals (Trading news such as NFP), and some traders are more technical and dig into specific patterns and analysis that happened in the past frequently and will most probably happen again. The last part is a trader that mixes both, fundamentals and technical.

Frequent Terminologies Used:

Currency pair: is simply a currency versus another currency. An example of this is EUR/USD pair, when you buy this pair, it means you bought EUR and you sold Dollar, and when you sell this pair, it means you sold EUR and you bought Dollar.

Leverage: Leverage allows a trader to have a bigger position size at a smaller margin.

Bid/Ask: The bid price is the price a trader is willing to sell a pair, while the asking price is the price a trader is willing to buy a pair. The difference between the bid and ask is called the spread.

Long/Short: Long and short refer to buying and selling respectively.