A Beginner’s Guide To Trading Foreign Exchange (Forex)

  • Are you an investor looking to start trading in the highly lucrative market of foreign exchange or forex as it is called?
  • Do you know about some key elements of the industry, how it functions, and what are some of the benefits?
  • Have you tried looking at research material, literature, and other assets available to individuals looking to enter the industry?

Let us start off with some figures, straight off the bat. The entire worth of the global foreign exchange trading industry stands at over $5.5 Trillion Dollars!

In other words, the market for trading foreign exchange is huge. This means that as someone who is looking to get a foothold in the market, the possibilities and profits are endless.

In this article, we will look at providing some of the core information, first-time traders and investors need to know about the industry. We will look at the benefits, the risks, and analyze whether this would be the right investment for you.

Foreign Exchange or Forex Trading: What does it mean?

Trading or investing in foreign exchange simply means buying and selling foreign currencies in the market. You buy a currency, for example, a dollar if you feel that the value of the same is going to increase. You sell a currency, for example, the Yen, if you feel that the value of the currency is going to drop.

Forex trading does not work through an Exchange as stock markets do. They function as Over-The-Counter (OTC) trades, initiated by your banking partner. In other words, trades are done from bank-to-bank, rather than a centralized exchange. This means that trading and investing are decentralized in nature.

The foreign exchange market follows the same logic as anything else. Meaning, it functions according to the rules of demand and supply. If the demand for a currency is higher, based on a number of external factors, it means that the supply is going to be limited. This will lead to a price hike.

Advantages of Trading in Foreign Exchange or Forex in 2021

In this section, we will try and list down some of the major benefits or advantages of trading and investing in foreign exchange.

  • Forex trading takes place 24×7 because banks are always open in some or part of the world. If the banks shut down in America at the end of the day, they open in Japan. This makes for opportunities to be present right through the day.
  • The liquidity of the market is what pulls many investors. As we have already stated, trillions of dollars in foreign exchange moves through banks at the same time. This allows for multiple entries and exit points for traders and investors.
  • The absence of a centralized governing institution makes for easy regulations and rules. As you need to deal with banks, the task becomes much easier and hassle-free. This boosts the trade margins and allows for greater flexibility.
  • The transaction costs are pretty low if you compare them with other forms of investments. This is because there are no intermediaries in the process. Apart from the bank, you do not have to pay any commissions to other external bodies.
  • As the market is a bit on the volatile side, forex traders and investors can benefit from huge profits in a short span of time. A favorable government change can shore up support for the economy, leading to the currency rising in valuation.

Hedgers and Speculators in Forex Trading

According to leading experts, there are two kinds of traders in the foreign exchange trading industry-

Hedgers: This kind of trader bets big on stability and long-term gains. They are likely to park a substantial amount of currency and forget about the same for a long time. Many institutional investors belong to the category of hedgers. Bigger companies like global MNCs are extremely wary of major price fluctuations in international currencies because of the nature of their business.

Speculators: Unlike hedgers, which are all about stability, speculators prefer volatility and price fluctuations. They are retail investors who want to make quick profits by pumping up the value of currencies and shorting them (selling) when they want to shore up profits. Speculators understand the risky nature of their craft and are willing to take the necessary risks.

The Final Word

In the last few years, traders and investors are using software and technologies that help make accurate predictions. Leading traders and investors go for the best free forex signals app to understand market fluctuations and how their investments will pan out.

Some of these apps also take help from Artificial Intelligence and Machine Learning to show charts, projections, and graphs, that help in making informed decisions in the industry.

If you are someone who wishes to know more about foreign trading, drop your questions in the comments section below and we will try to answer as many of them as possible.