What is Forex?
Forex, short for foreign exchange, refers to trading one currency for another. It is also known as FX.
Where is Forex Traded?
Forex is primarily traded through three venues: the spot markets, the forward markets, and the futures markets. The spot market is the largest of all the three markets because it is the “underlying” asset on which the futures and futures markets are based.
Why do people trade currencies?
Companies and traders use forex for two main reasons: speculation and hedging. Traders use the former to make money from rising and falling currency rates, while the latter is used to secure manufacturing and sales prices in foreign markets.
Are the forex markets volatile?
The forex markets are among the most liquid in the world. Hence, it tends to be less volatile than other markets, such as real estate. The volatility of a particular currency is the result of multiple factors, such as the politics and economy of its country. Therefore, events such as economic instability in the form of a default or imbalance in trade relations with another currency can lead to significant fluctuations.
Are the forex markets regulated?
The regulation of forex trading depends on the jurisdiction. Countries like the United States have developed infrastructure and markets for conducting forex trade. Hence, forex trading operations are strictly regulated by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). However, due to the extensive use of leverage in forex trading, developing countries like India and China impose restrictions on companies and capital to be used in forex trading. Europe is the largest market for forex trading. The Financial Conduct Authority (FCA) is responsible for monitoring and regulating forex trading in the UK.
What currencies can I trade?
Highly liquid currencies have a ready market and thus show smooth and predictable price movement in response to external events. The US dollar is the most traded currency in the world. It features six of the seven most liquid currency pairs in the markets. However, currencies with low liquidity cannot be traded in large volumes without significant market movement correlated with price. These currencies generally belong to developing countries. When paired with the currency of a developed country, an exotic pair is formed. For example, the pairing of the US dollar with the Indian rupee (USD/INR) is an exotic pair.
How do I start forex trading?
The first step to forex trading is to educate yourself about market operations and terminology. Next, you need to develop a trading strategy based on your money and risk tolerance. Finally, you should open a brokerage account. Today, it is easier than ever to open and fund a forex account online and start trading currencies.
For traders – especially those with limited funds – day trading or swing trading with small amounts is easier in the forex market than in other markets. For those with longer-term horizons and larger funds, long-term trading based on fundamentals or carry trading can be profitable. Focusing on understanding the macroeconomic fundamentals that drive currency values, as well as expertise in technical analysis, may help new forex traders become more profitable.