5 Explanations That You Should Know About Foreign Exchange

5 Explanations That You Should Know About Foreign Exchange

24 May 2019 03:19 PM

Foreign Exchange Market

Are you sure what the terminology foreign exchange market implies?
If the answer to this question is a ‘No’, the five key explanations on the term will help you get a thorough understanding of the term.

  •  Foreign exchange as the term says is an exchange of foreign currency. Exchange of one country’s currency against another country’s is done in the foreign exchange or forex market. The price of one currency quoted against the other currency is the exchange rate. For example 1 USD = 70 INR; so here to purchase 1 US Dollar, 70 Indian Rupees has to be given. Thus the price of USDINR is quoted as 70. Similarly 1 EUR will fetch 1.12 US Dollars. EURUSD = 1.12.
  •  Inspite of being the largest in terms of turnover, the foreign exchange market is not a regulated one. Thus entrusting the faith on the trade agreement with no central governing body the currency trades are done. Self regulation helps to maintain the fairness in the market.
  •  For a first time trader, currency market is generally seen as a quick buck making avenue. That’s why 90% of the volume in foreign exchange market is speculative in nature. Traders enter the market to take advantage of the currency market fluctuation. Since the market is open on all five days of the week 24 hours a day the opportunity is humongous for a trader. This happens as market is open across all time zones.
  •  In order to trade in the currency market, one has to understand the forex money management. Money management is important in order to maximize profits and minimize losses. One should be aware of the various factors which are to be considered while managing forex money. Stop loss orders are important to limit the losses and to have trailing stops to lock in profits.
  •  Foreign currency movement is analyzed by the traders and advisors through fundamental and technical analysis. To invest or trade in the market one must analyze the market trend, economic health of different countries. Fundamental analysis helps in knowing how the economy is fairing, how is the GDP growing, the employment status of the people, inflation rates, etc all give an understanding of the economic health of the country. Similarly a country’s growth is compared to other country on the same parameters. This gives the currency pair of those economies to move according to the data which is printed. Technical analysis is based on historical prices and volume of a currency pair. Pattern recognition helps in identifying the future trends and aids in predicting the price movements. Statistics is extensively used to analyze the market technically.

The forex market is a huge market and volumes of transactions take speed daily. Knowing on the details and varied terminologies will help one make ace the trading skills. What do you think? Isn’t it true?

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