Forex trading, also known as FX trading, involves the buying and selling of currencies of various nations. In the forex trade, currencies are exchanged continuously in the forex market that spans the globe. People are presented with profit-making opportunities in forex trading when the value of one currency fluctuates against that of another.
People conduct Forex Trade to:
1. Make direct foreign investments
2. Earn profits from short-term fluctuations in the value of a currency pair
3. Manage their existing positions in the market
4. Fulfill their import and export requirements
As the forex market does not have any centralized exchange, trading is conducted either through the Electronic Broking System (EBS) or on the Internet. Online forex trading is most popular among individual investors. High leverage, liquidity and flexibility are the three factors that attract people to forex trading.
How is Forex Trading Conducted?
As with other transactions, forex trading involves buyers, sellers and intermediaries.While buyers and sellers in this market could be banks, hedge funds, investment management firms, commercial companies and retail investors, the intermediaries are brokers. Forex brokers act as market makers and place bid and ask prices for a currency pair on behalf of a buyer or a seller.
Buyers make money by purchasing a currency at a lower price and selling it later at a higher price. All transactions by individual traders in the forex market occur through brokers. However, most of the forex trade is conducted between banks.
Benefits of Forex Trading
The benefits of forex trading are:
1. It is conducted in an extremely liquid market. Thus, you are unlikely to get stuck in a trade. You can open and close any position at your desired level.
2. Traders can benefit in both rising and falling markets. You can take a short position (selling the currency pair and buying it back at a lower price) or long position (buying the currency pair and selling it later at a higher price).
3. Provides traders the option of trading in small lots. If you are a novice trader, you can opt to open small accounts and start trading with small lots. This allows you to begin with little capital and limit your risks.
4. Traders do not have to pay commissions to brokers. The cost of the transactions is built into the currency price and is known as the spread, which is the difference between the buying and selling price at any given time.
Drawbacks of Forex Trading
Forex trading can lead to huge losses if the trader is a novice. The lack of prompt action can also lead to substantial losses.