What is Foreign Exchange and Foreign Exchange Market?

What is Foreign Exchange and Foreign Exchange Market?

21 Jun 2018 04:05 PM
 

Basic understanding of Forex Trading?

The forex market is a decentralized market for trading currencies that includes buying, selling and exchanging currencies at current or determined rates dictated by the market and influenced by various factors like geopolitical and economic conditions. It is the world's most enormous and most liquid market, which has an average trading volume exceeding $6 trillion daily. Here the currencies are traded electronically over the counter (OTC), implying that the trading occurs through a worldwide network rather than one centralized market. The market is functional 24 hours a day, five and a half days a week with major financial centers at London, Singapore, Paris, Sydney, New York, Tokyo, Zurich, Frankfurt and Hong Kong. The main players of this market are the larger international banks. Financial centres worldwide function as anchors of trading between a wide range of buyers and sellers around the clock, except on the weekends. Trading currencies is a little different to trading shares or stocks, as currencies are traded against each other. 

Trading forex involves buying one currency, and simultaneous selling of another wherein correct speculations on the direction currencies are likely to take in the future, dictate traders' profits. Based on your thinking of what the currency’s value can be you can trade the currencies to earn a profit, and unlike stocks, you can trade up and down easily. It’s a simple matrix wherein you determine your trade which is buying and selling based on your speculation influenced by your research and expert inputs. regarding the movement of currency values in the market. The principle of forex trading is the same as for any other asset – buy low and sell high or sell high and buy low. Since currencies are always traded in pairs, the foreign exchange market does not set a currency's absolute value but rather determines its relative value by setting one currency's market price with another.

Opportunities in Forex - foreign exchange:

Besides the inherent risks associated with forex, the advantages it presents to not only organizations but also individuals, professional traders and investors are numerous, luring many to dive into the world of forex trading. The foreign exchange market provides, 

 

  1. High liquidity: Foreign exchange market is not just the largest market globally, but also the most liquid with $6.6 trillion in daily trading volume. The high liquidity fosters a currency pair's ability to be traded (bought/sold) on demand thereby allowing ease of trade making the market popular among traders. 
  2. Low transaction costs: The overall trading costs are low with both commission and no commission pricing structures being available and no exchange or regulatory fees, enabling a starting point that is readily accessible to individuals. 

  3. 24-hour market: Trading is not confined to limited hours or time zones.

  4. Leverage: Forex brokers offer retail traders leverage, allowing the possibility of magnification of returns from favorable movements in a currency's exchange rate. However, besides the advantage aspect, it can also magnify your losses due to currency movements that do not align and favour your speculations.

The multiple digital platforms allow retail forex traders to enter the market and trade from any location and offers outsized potential opportunities for those who are comfortable taking more risk.

There are two recognizable features to classify currency as an asset class:

  1. One can earn the interest rate differential between any two currencies.
  2. Ability to acquire profits through the changes in the exchange rate between currencies driven by the forex market.

An investor can make significant profits by buying the currency with the higher interest rate and shorting the currency with the lower interest rate because of the variance between two interest rates in different economies. Moreover, one can yield the benefits of forex trading by employing a currency carry trade strategy in which a high yielding currency funds the trade with a low yielding currency. Foreign exchange market dictates the forex rates for the effectuation of any currency exchange and thus determine the value one will conceive upon realization of a transaction like money transfer. There are basically three ways in which corporations, individual traders and institutions can trade in forex exchange market:

  1.  Spot markets - The spot market is where financial instruments, such as commodities, currencies and securities, are traded for immediate delivery.
  2. Forwards market - A forward market is an over-the-counter marketplace that sets the price for the trade of financial instruments, such as commodities, currencies and securities for future delivery.
  3. Future markets - On the other hand, a futures contract is based on the delivery of the underlying asset at a future date.

Before the spot market, the future market was booming because it was available to individual investors for a longer time. However, as electronic trading and various other forex brokers trading at forex rates came into focus, the spot market skyrocketed in activity transcending the futures market and becoming the favourable trading market for individual investors and speculators. When an individual is referring to the Forex market, he/she is mainly referring to the spot market. The other two markets, i.e. forward market and future market, are generally used by big organizations with operations in foreign countries or involved in international business transactions.

Understanding of Foreign Exchange Market

There are various factors like interest rates, tourism, economic strength, trade flow and geopolitical risk that create a supply and demand of currencies, causing the daily volatility in the forex market and generating risks associated with forex trading. There are avenues for individuals to enter the market even though investment banks, pension funds, and large corporations have typically dominated this space. Trading currencies in the foreign exchange market is different from traditional markets as the trades are conducted on over the counter (OTC) markets—non-centralized markets made up of a network of participants rather than operating on formal, centralized exchanges. Acknowledging the variance in relative values of currencies in conjunction with keeping a tab on forex market happenings is important to build effective strategies to strengthen your trade. The two currencies involved in the transaction form a currency pair, where a representation of each one is executed by three letters - the first two letters representing the name of the country, and the third letter representing the name of the currency, for example, Indian Rupees: INR, etc. All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies called ‘currency pairs’, and include a base currency and a quote currency wherein seven major currency pairs constitute around 68% of global forex trading.  

Risk Management in Forex Trading

Forex can be quite complicated for beginners and carries certain risks due to its volatile nature and the profits being directly related to currency value speculations based on your research and market trends. There are no centralized markets like the stock exchanges to facilitate your trades; however, one can effectively trade currencies if you acknowledge the risks and trade conservatively while mitigating them through Forex risk management. There are three types of risk in forex trading due to the involvement of currencies and assets which are highly liquid and volatile. 

  • Economic Risk can affect the present value of future cash flows and reflects the degree to which a firm's market value is influenced by unexpected exchange rate fluctuations and is the risk associated with the firm's market share position with regard to its competitors, future cash flows, etc.
  • Translation Risk refers to the firm's financial reporting impact due to exchange rate movements. This type of risk is encountered by Multinational organizations having business relations with foreign countries and hence dealing in different currencies. 
  • Transaction Risk is related to the time gap between entering into a transaction and settling a transaction since the exchange rates in the forex market are not fixed and undergo fluctuation due to certain factors. 

Organizations employ different hedging strategies and other techniques composed of both internal and external techniques to minimize exchange rate risk. Internal techniques include an invoice in home currency, leading and lagging and matching the revenues and expenses. In contrast, the external techniques include forward contracts, money market hedges, future contracts, options, forex swaps and currency swaps. Individual traders must understand currencies are correlated and are priced in pairs to better control your Forex portfolio's exposure by reducing the overall risks. Determining your risk tolerance, depending on various factors such as your age, knowledge of FX trading, your experience in this field, your investment goals is a crucial aspect to fortifying yourself to the risks.

How Myforexeye helps you with Forex Trading?

Forex Risk Advisory is an advisory service provided by MyForexEye to guide users on mitigating the risks associated with forex provided by professionals bearing years of experience and expertise. Since currency trading is risky, our services that offer you access to trading calls, dealing room and customized strategies allow one to safeguard them or their business from losses arising from forex exposures. Besides this Myforexye also extends services that entail managing your funds, transacting on your behalf, alert functions and many others. Building a currency trading plan for you after a thorough risk-reward analysis encompasses our fund management service wherein risk taken is based on your risk appetite, with a suitable forex trading strategy to generate returns. Our forex dealing room is equipped with all the systems to assist dealers in making secure and timely currency market transactions. It includes a team of qualified and seasoned professionals, with more than 55 years of cumulative experience in bank treasuries, forex consulting companies as well as a large corporate treasury. Our Alert functions allow the user to remain updated on the market trends and aids them to take appropriate action regarding their strategies. Myforexeye research takes into account both technical and fundamental factors while generating a forex trading strategy. Also, enhancing profits and stopping losses while trading currencies is what our strategy adheres to and enforce.

Conclusion

Myforexeye is your destination to get all your forex needs, whether it be individual or organizational and irrespective of their scale,  resolved. Our Specialized team is armed with advanced technology and expertise of experienced professionals to extend convenient solutions that simplify forex for you while dispensing important information and quality research. Our user-friendly web portal and mobile app reinforced by our transparent streamlined process and service empower users to make savings and insight into real-time rates and best quotations from banks to equip you with the best possible options. One can also mitigate their forex risks through our expert consultation and risk advisory services available on a transitional basis and available whenever the need for it arises.

Speak to one of our specialists to acquire a detailed understanding of Myforexeye forex services.

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