The foreign exchange market is the market to exchange foreign currencies. When a person visits foreign, he needs currency of that country then he exchanges his currency to that country’s currency. This currency exchange is called forex exchange and the market where these currencies are bought and sold, called forex market. Forex trading defines the trade of different foreign currencies under a network and all the trading is conducted over the counter platform that means there is no physical platform to conduct the market activities.
This type of trading is done among the different banks and financial institutions without any central authority. This market provides a platform where anyone can trade currencies for practical purposes as someone visits abroad then he needs foreign currency to live there and other people can trade the currencies for their big amount of profit. This profit is decided by the demand and supply of different currencies, where a person can buy a currency and can sell it whenever the price hikes. The volatility rate of currencies attracts traders to earn a lot of profit.
Forex Trading System
All the currencies are assigned a three-letter code to represent its nation’s name. There are more than 170 country’s currency in forex trading, that’s why it is important to give a code to each country. Like US dollar is known as USD, European currency is known as EUR, Japan’s currency is known as JPY and British pound is known as GBP etc.
In forex trading the pair of two currencies exchanges with one another like EUR-USD, JPY-USD. Let’s see the popular pairs of forex trading.
These pairs of currencies represent the exchange rate of those different currencies. It means EUR/USD defines that what is the exchange rate between Euro and US dollar. In this form left side currency is considered as base currency and right-side currency is considered quote currency. That means how many unites of quote currencies are required to buy 1 unit of base currency. If the EUR/USD is 1.5 then 1.5 USD will be enough to buy 1 EUR. The exchange rate affects both currencies, if the rate is increased, base currency can buy more quote currency and if the rate is down base currency will not be able to buy more quote currencies.
Pros of Forex Trading
Easy to Access
In the market of forex trading any one can start trading with a forex account that can be made easily on internet. Traders can do the trading 24 hours for 5 days in a week that means from Monday to Friday you can do your trading on any time of a day. All the significant information regarding forex market is available on internet that helps every trader in trading.
Leverage defines the ratio of broker’s money to trader’s own money. It means if you borrow money to invest in trading market and you take $80 from broker and you invest your own money of $20, this ratio of money is called leverage ratio. In trading market this ratio is quite high rather than stock market. So, anyone can take higher amount from broker and invest in market.
Due to the volatility of exchange rates, making money in no time is possible. In this market you can earn money in less time than other types of market. This specification attracts more investors.
In this market all the necessary and fundamental information that are required to invest, is available on internet with detailed analysis of different currencies. In other market you have to keep all the relevant knowledge of that share or bond but in this, forex market provides technical help itself.
Less Insider Interfere
In the market of stock, bond and other commodities the influence of insider’s information affects the market. This way they can make anyone benefit and can make anyone lose. But in currency exchange market it is tough to leak the information because it is less centralized. This way currency market is far better than other markets.
The forex market is known for less fees and commission charges that we often see in the share, bonds, mutual funds and other markets. This specification makes forex trading is less costly than other market.
Without any regulatory body
Unlike the other markets there are no such regulatory authorities. That means it is a decentralized market that works on whole market’s activities. This helps keeping away outsiders interfere and keeps costs at low level.
Cons of Forex trading
Too Much Volatility
We can see volatility in each market but there is much this one. The rates of exchange change every second and continually. It might yield investors but sometimes it proves diverse and make loss, sometimes it makes any investor insolvent too.
Not too Good for Small Traders
In forex trading famous and big financial institutions are involved like banks of different countries. The understanding of these big bankers are far better than small investors, that does not let the small investors get benefitted.
Due to lack of regulatory authorities, there is no one who can regulate and authorize the transactions that sometimes suspects the transparency of this market. There is a need of a regulatory authority that can regulate the activities of brokers.
High Leverage Ratio
The leverage ration in this market is too high. That means the amount of borrowing money is higher than trader’s own money. If you are benefitted than you can easily pay the borrowed amount but if your money is lost then it will prove too costly and it might make you bankrupt.
No Outsider Assistance
In the market of stock, mutual funds and other bonds you can get the advice of professional or counsellors that can make you more profitable. But in this market, you will have to do marketing on your own dependence. This way you cannot touch the significant effecting topic because you are not well versed like professionals.