Foreign Exchange (widely known as Forex) has acquired worldwide recognition for itself among online traders. The online FX market allows almost every country’s currency to be traded against each other instantly. Forex liquidity is very high, and it can reach even more than $5 trillion a day. Forex trading is a continuous process; it offers 24/5 trading, the lowest margin, and the highest leverage among other financial markets. The fact that this market is decentralized (OTC) makes it more appealing to the financial traders and investors.
• What is an Exchange Rate?
The exchange rate represents the value of currencies in relation to one another. It is quoted either as direct currency (aka domestic) or indirect currency (aka foreign). In Forex, currencies are displayed in pairs such as EUR/USD, and in this case, EUR is the base currency, and USD is the counter currency. Moreover, if neither of the currencies is the US dollar, for example, EUR/CAD, then the exchange rate is referred to as Cross Currency. In most case, the exchange rate is quoted 4 digits after the decimal, but JPY (Japanese yen) is quoted in 2. The exchange rate is offered as either fixed or floating.
• Who Participates in the Forex Market?
The major participants or the biggest shareholders of the FX market are Central banks and government organizations. Banks and financial institutions offer exchanges, provide supplies and interbank transactions; that is to say, they build their influence upon credit. Next, we have the international corporations whose main focus is on hedging. Speculators or currency traders take advantage of currency movements and try to speculate the future directions of the market based on fluctuations. And finally, it is safe to assume that any person could be considered an investor in the Forex Market by engaging in activities such as traveling, online transactions, and investment.
• Forex Regulations
A large market like Forex needs rules and provisions to keep it in check. Internationally known regulatory authorities such as CySEC (Cyprus), FCA (UK), ASIC (Australia), and IFSC (Belize) are among many others that oversee the activities of the listed financial companies, forex brokerage firms and the like. These well-established organizations are responsible for granting or revoking licenses, running audits on a regular basis, enforcing administrative penalties and many more. These laws and regulations are administered to safeguard customers from fraudulent financial misconduct; however, this can be effective only to a certain degree given how huge the FX Market is, and the fact that these supervisory bodies can enforce the rules only within their jurisdiction. Not all the forex companies out there are regulated and under supervision, but those that are fully regulated provide a safer and more secure atmosphere for the traders and investors of the market.
Forex is the most extensive financial market in the world with a daily turnover much higher than any other market. Trading in the FX market is processed very fast, easily accessed, highly liquid, and open to everyone including small investors. Perhaps the features that make Forex trading more popular are its vastness, decentralization, and being virtually accessible (online). The fact that it can be accessed from anywhere and at any time, no matter the time zone or geographical location, attracts more customers and willful traders every day. There are many advantages surrounding the FX market, check out the most important ones below:
24/5 Market: Forex trading starts on Monday Morning in Australia and ends on Friday Afternoon in New York. This would give the traders plenty of opportunities for making profits in five consecutive days. In this way, traders can set their own hours, trade at their own pace, and most importantly have time for other daily activities.
Unparalleled Liquidity: a 24 hour active market such as Forex tend to attract a diversity of participants to invest; this can include commercial and central banks, investment firms, hedge funds, retail brokers, retail traders, and many other individuals worldwide. Their participation guarantees the high liquidity of the market at all hours. In such an atmosphere, the traders will not have a problem placing orders given the number of different available buyers and sellers in the market. Whenever you place a buy order, you will find a trader willing to sell or vice versa.
High Leverage: high leverage is one of the unique features that Forex Market is known for. Using leverage as high as 1:500 would allow market participants to handle more money than their account figure allows them to. Small investors can also make use of this feature to gain more profits. However, leverage should not be taken lightly because using leverage can land you either a substantial profit or erase all your money.
Profit in both Directions: The Forex Market allows you to make profits in both rising and falling directions. You can strategize your plan and choose when to buy (at a lower price) or sell your assets (at a higher price) considering the direction of the market. When you go long (buy), and the pip value of your currency pair rises, you make a profit, the same is true when you can go short (sell), and the pip value of your currency pair falls, in which case you also make a profit. That is why in Forex Trading both directions can be profitable.
Low and Cost-Effective Commission: Unlike other financial markets, Forex accepts all kinds of traders, it doesn’t matter if you are a small-time trader or an investor with large pockets - Forex does not discriminate. The trading conditions of the FX market are more affordable than other markets simply because there are more active companies in this market. Forex companies charge a very low and mostly fixed commission from their customers. The spread price - the difference between the bid and ask prices - in the FX Market is also very minimal compared to other markets.
Easy to Access: the online nature of the Forex Market has made it accessible to everyone. Many online Forex companies now offer various financial services to their customers which include fixed/floating spreads, high leverage, trading platforms - MT4 & MT5, customer support (even in the local language), and market analysis. Forex also offers marginal trading allowing you to control more funds than your actual budget. So basically anyone, big or small investors, can join the market and start trading.
Demo & Micro Accounts: New-comers can use demo accounts to familiarize themselves with the Forex Companies and Forex in general. This is very useful in terms of getting to know the trading products, platforms, and other services in a simulated environment (via virtual money). In this way, the traders will not lose any of their money and yet learn a lot about their trading strategies. Micro accounts are also suitable for inexperienced traders who want to trade a small amount of their own funds with limited risks. Even some of the skilled traders prefer to work with micro accounts.
Suitable Trading Platforms: The most common trading platforms offered by many Forex companies include MetaTrader 4 / 5, Web Trader, Multi Terminal, Android, and IOS. These platforms enable you to manage your trades, keep track of your every move, and review market analysis, news and many more. Additionally, they are customizable, i.e., you can change certain features in them according to your trading strategies or even build your own strategies from scratch. These platforms are designed in a flexible manner just to make your trading experience all the more enjoyable.