What is Forex Trading?

What is Forex Trading?

Forex trading involves dealing in international currencies. Here, one can sell currency of one
country to buy that of another. The trader deals in Foreign Exchange [Forex] at the most
appropriate time to profit from the transaction. Good ability to forecast plays a vital role here. One
may wonder how Forex trading can be such a lucrative earning opportunity since fluctuations in
exchange is so little.
But remember, when done in big volumes, a minor change can mean a lot. There are many non-monetary advantages to it as well. Anyone who wants to deal in Forex can do so, since only the
basic knowledge is required for it.
Forex can help you earn a lot of money. But there are certain conditions to follow before trading in
Forex. Firstly, one must have a thorough knowledge about the trends in the stock market, the
basics of trading and risk-taking ability. You will get all the help you need for attaining these
conditions very easily.
There are many sites on the internet which can help you clarify your basics and help you brave
rough weather. A good reason why Forex trading can be considered is the fact that there are
frequent fluctuations in currencies, though in percentage terms it may be small.
You gain if the fluctuation favors you and the reverse holds true as well. No one can accurately
predict the trend of the currencies. Liquidity is another reason why Forex trading is so popular.
Now the most important part – in Forex, you can make huge sums of money even if your initial
investment is on a lower side. You can invest as little as $50,000. Rich people have no upper cap
to the amount of investment. So remember that even with a nominal investment, the earning
ability is undoubtedly very huge.
Most of the great businesses are connected to the world of internet today, and Forex trading is no
exception. You can deal in foreign currencies right from your home. In fact, it is fully conducted
online. You have the liberty to choose when you want to trade, and you don’t need to meet any
deadlines.
Basically, you can be your own boss. The process of online trading is fairly simple for anyone to
understand. You just need to open an account for Forex trading with a recognized broker and
they will complete the rest of the formalities. The only bit you need to do is get ready with your
investment amount.
So, it is thus clear that Forex trading can be one of the best businesses to earn money. Though
there is a level of risk attached to it, but it can be avoided with due care and an alert mind!
Importance of Forex trading
Foreign Exchange [Currency Trading] involves exchanging of different foreign currencies for a profit. The reason for buying the currency of another country may be the need to buy some commodity of the said country as well, besides making money through the difference in exchange rates.
In the latter case, people buy currency of a foreign country when the rate in the market is low, and
sell it off when the rates go up. Currency trading is usually done between the central banks, the
government, speculators and MNCs. Nations cannot trade with each other without the presence
of a foreign market.
A huge amount of money is daily traded in the Forex market, though the amount invested by an
individual trader may be very low. No one individually can have any influence on the Forex
fluctuations, not even the government. So it can easily be concluded that the level of the currency
reflects the strength or the weakness of the economy of a country. So this makes the Forex
market a good place for competition.
The government and the central bank do try to stabilize the currency of their country by
speculating, by buying and selling currencies at appropriate times. So they can influence the
market if they conduct a trade in huge volumes, though. To buy its own currency, however, the
government or the central bank must have huge reserves of foreign currency with them. So it is
virtually impossible to inflate the currency value artificially.
Banks trade a lot in foreign currencies and this forms a chunk of the volume in the Forex market.
They buy currencies not only as individual bodies, but also on behalf of their clients. They trade in
lots of futures. Till a few years back, the brokers could influence the volumes of trading in the
Forex market. But due to the electronic services available now, the services of brokers is not
required. It’s easy to operate electronically.
Trading with international countries is possible only with the existence of Forex markets. When
there is no Forex market, there is no common currency between two countries, so one cannot
evaluate the value of one currency with respect to the other.
The buyer pays the seller in the former’s currency. With the money so received, the seller buys
goods in the buyer’s country and sells those goods in his [seller] country.
Only then he is able to know how much he has earned through the export. In the presence of a
Forex market, though, it is very easy for a seller to know of his earnings at the very instant that he
conducts an export trade. In the same manner, the buyer too will have a thorough knowledge of
the cost he will have to incur to buy goods from an international country.