|
Simply put, foreign exchange, more popularly known as Forex or FX, is
the simultaneous purchase of one currency and sale of another. The
market for trading in currencies is known as the Forex Market. While
getting started in Forex, you must understand that the Forex market
determines the “exchange rate” for which the specified currencies can
be bought and sold. This exchange rate is essentially a price and can
be analyzed in the same way as we would analyze a price.
This can best be understood by providing an apt analogy in terms of the
price of the commodity. Say that commodity is a pencil. If the purchase
price of 4 pencils is $1 then, the dollar-to-pencil rate of exchange
will be 4 pencils. You can look at this from another angle also. You
can also have a fair idea of the pencil-to-dollar rate of exchange.
This comes out to 25 cents. This essentially means that if you sell one
pencil you can get 25 cents for it. You must understand that the rate
of exchange that is available in the newspapers doe not refer to these
simple commodities but gives readers information about the comparative
prices for different currencies.
Getting Started in Forex!
Forex, in the true sense, is a global 24-hour marketplace. This is
because, investors can respond in real time to any fluctuations caused
by current economic, social and political events. You can get started
in Forex by choosing two currencies you want to trade in. This is
because the currencies are traded in pairs, i.e., Euro and Yen, US
Dollar and Euro etc. The foreign exchange market is unique due to the
extreme liquidity associated with it. Money freely flows from this
market since millions of dollars can get in and out of it each day. It
is also considered liquid due to the fact that traders can just open
and close their trade positions in a wink of an eye!
Bevy of Trading opportunities in Forex
The sheer number of currencies traded is fascinating. There will always
be currencies that are moving rapidly up or down, offering
opportunities for profit (and commensurate risk) to astute traders.
Yet, like the equity markets, Forex offers plenty of instruments such
as forward contracts, futures and options, spot market etc, to mitigate
risk and allows the individual to profit in both rising and falling
markets.
Who can participate in the Forex Market?
Until recently, this 2 trillion dollar market was reserved for banks,
insurance companies, large corporations and other large institutions,
as the minimum traded volume was rather high. However, less than a
decade ago, it became possible for retail investors to get started in
the Forex market through dealers. Although the retail market for
currency trading is more or less a parallel to the inter bank market,
prices in both markets are very similar and move very closely.
Conclusion
The currency markets are hard to resist due to its sheer liquidity,
opportunities for booking huge profits and high levels of leverage.
However, you must also be aware of the risks involved in this segment
so as to make an informed decision before venturing out into the
unexplored world of Forex! |