As a child, I remember collecting coins and banknotes from my father whenever he returned from one of his overseas trips. Colors, pictures, names and currency signs – this will take me to a different world – a place where I see myself traveling to different countries around the world. As I grew up, I traveled to different countries and the collection of coins and banknotes of different currencies continued to grow.
This interest in collecting different currencies soon developed into studying the relationship between one currency and another and soon entered the world of foreign currency trading or commonly known as FOREX. My interest led me to www.ForexSQ.com; a website, where I learned everything about Forex trading and started my trading activities from and have continued ever since.
Last week, when I was sorting through my coin collection; my daughter asked me to explain to her what is Forex Trading. Before I started talking about the intricacies of Forex trading, he smiled and said, “Dad, start from scratch and keep it simple. I have absolutely no clue about this but would like to know and understand why it fascinates you so much. Taking a deep breath and gathering my thoughts, I started.
What is Forex Trading?
The term 'Forex' stands for Foreign Exchange. Forex trading is simply trading the currencies of different countries against each other; for example the US Dollar against the Euro. Anyone dealing with a foreign country – be it a vacation there, or wanting to buy something from that country or pay for services, generally needs that country's currency to do so.
For example, to pay your tuition in Dubai, I have to make payment in UAE Dhiram as Indian Rupees are not accepted there. Of course, I can pay in US Dollars too, as it is accepted almost everywhere, but that is a different story. So, to make this payment, I had to buy UAE Dhiram by paying the equivalent amount in Indian Rupees.
Remember all the signs that say 'Foreign Exchange Sales/Exchange here'; well, that's where I gave Indian Rupees and got UAE Dhirams in exchange. Now this broker gave me the UAE Dhiram, they have to buy the same – this is done in the foreign exchange market – the largest and most liquid financial market where more than $4 trillion of currency is exchanged daily.
One of the most interesting things about this market – there is no brick and mortar market for Forex trading. Every transaction is done electronically over-the-counter. Unlike stock exchanges, the Forex market remains open around the clock with currencies being traded in each time zone, five days each week. Interesting right?
ET PRIME - POPULAR MARKET STORIES
Stellar is back or just a mirage? How can Brightcom's fundamentals not support its valuation, Stellar returns or just a mirage? How Brightcom's fundamentals don't support his judgment Pakda style too chor: In the bullshit called running ahead and what this episode of Axis MF teaches us: Indian footwear makers gear up for explosive growth in a post-pandemic world Spring in their stride:
Indian footwear makers gear up for explosive growth in a post-pandemic world See what Nifty50 stock analysts recommend to you Buy this week See Nifty50 stock analysts recommend to 'Buy' this week Midcap stocks with high upside potential: Stock Plus report High upside potential midcap stocks: Shares Plus ReportSave with a score of 10 out of 10 on Report Plus Stocks with a score of 10 out of 10 on Report Plus Stocks
Subscribe to ET Prime
Like the broker who converted my Indian Rupees into UAE Dhirams, I also trade on the Forex market myself – all it takes is to open an account with a Forex broker. I chose one from ForexSQ and have been trading ever since. However, Forex trading is different from exchanging money at Foreign Exchange outlets.
There is much more to Forex trading than simply exchanging one currency for another. The two currencies that have the highest trading volume on the Forex market are the US Dollar and the Euro – however, other currencies are also traded. One of the biggest advantages of trading Forex is the 'leverage' provided to me by my broker. Unlike the stock market or futures market, where my broker offers 2:1 and 15:1 leverage, my Forex trading broker offers 50:1 leverage; 100:1 and even 200:1 depending on my trade size.
This means that if I want to buy, say, $100,000 and are given 100:1 leverage, I only need $1,000 in my margin account with a broker that is only 1%. Oh! I forgot to tell you, standard Forex trading is done in 'lots' with each lot representing 100,000 units of currency. Now, 100:1 leverage sounds risky – what if I lose? However, in general, currency prices on an intraday trading basis change by less than 1% - which makes it less risky than it sounds, right?
The price of any currency is always versus another currency – for example the US Dollar versus the Euro. The two currencies in the quote are known as a pair consisting of the 'base' currency and the 'counter' currency. In USD/EUR (US Dollars to Euro) quotes, the 'base' currency is USD and the 'counter' currency is EUR.
So buying and selling currency pairs is based on whether you think the base currency will appreciate or depreciate against the counter currency. One interesting aspect – you will find most currency pairs quoted up to 5 decimal points. Now, obviously, you're not dealing with small fractions like that when you use money to buy something.
However, in the Forex market, the change from the 4th decimal point in the price is known as a 'pip' which stands for Percentage in Points. Say, the price of USD/EUR moves from 1.33800 to 1.33940 – this means the currency has gone up 14 pips, i.e. 94-80=14. 'Spread' is the difference between the bid/ask of the currency pair. Recalling the previous example, if the USD/UER pair was trading at 1.33800/1.33806, the spread would be 0.6 pips or 0.00006. It roughly covers the basics of Forex terms used in the market.
In fact, there are three ways in which individuals, companies, and institutions trade Forex – the spot market, the forward market, and the futures market. The spot market is witnessing the largest trading quantum – as the futures market and futures market are based on the underlying real asset, namely the spot market. However, this is not always the case. The futures market was preferred in the past because it was available for a longer period of time to individual investors.
But, now with electronic trading, the spot market surpasses all others. However, companies and institutions prefer the futures and futures markets over individual investors, as they need to hedge their foreign exchange risk.
Oh sorry I wanted to tell you the difference between spot, forward and futures trading. The spot market is where I buy or sell a currency at its current price – which is determined by supply and demand for a particular currency. This demand/supply depends on various factors such as, political situation, interest rates, economic performance and perceptions of how the currency will perform in the future. Well, when I buy or sell a currency and the deal is done, it is known as a 'spot deal'.
The biggest difference between spot trading and forward and futures trading is that while spot trading deals in actual currencies, futures and forward trades are not. This market trades 'contracts' – which represent claims for a specific currency, a specific price per unit, and a future settlement date for that trade. Forward markets witness 'contracts' with terms of an agreement made between two parties who buy or sell them over-the-counter.
'Future contracts' that are carried or sold in the futures market are based on standard sizes and settlement dates. Futures contracts have specific details, such as, settlement and delivery date, number of units, minimum price increase, etc.
It is traded on a public commodity market with exchanges acting as partners for traders, i.e. providing permits and settlements for trades. I suddenly realized that I was going into too much detail and said, "There's a lot to understand here, but that means going into more detail than you'd like." My daughter just nodded in agreement and looked at my laptop screen saying, “So where does ForexSQ fit into this picture?”
Well, when I wanted to learn about Forex trading, my friend suggested that I try this site. I did and it hasn't changed since then. In fact, when you asked me to tell you about Forex, I suggested you visit the site yourself. This site contains not only basic information for those who have absolutely no idea or knowledge of Forex and Forex trading, but also features detailed information on Forex trading, knowledge-based articles and information, news from Forex, Equity and Commodities markets, information and links . for brokers, analysis of various markets and financial news from around the world.
After spending a few weeks reading all I could about Forex trading, I signed up with a broker from their list and opened a Demo trading account. This helped me immensely, allowing me to practice Forex trading without any risk. Once I was sure that I could manage a few small trades without risking too much, I chose a mini live account with the same broker.
The process itself is rather simple and everything is online. I deposited some money into the account and started trading – and have been doing it ever since. Oh, they also have a list of the top Forex managed account service companies that will allow you to invest in the Forex market – even if you have absolutely no knowledge of Forex.
All you need to do is place a small amount of margin money in your account and the broker handles all the trading and account management for you. I opened two accounts – one where I trade myself with a mini account and one in which the broker trades and manages a mini account – like spreading my risk.
Forex SQ features a list of top brokers and in-depth information on Equity trading, CFD Trading, Binary Options trading, Spread Betting and of course Forex trading. This site features reviews and comparisons of various brokers/broker houses allowing you to research the pros and cons of each before making a decision to sign up with them. In short, it's a one-stop site for learning and trading – and I also recommend it to those who ask me.
My daughter looked at me for a few seconds and walked away, leaving me wondering what was going on here. A few minutes later he walked back into the room and said "Dad, can I give you 50% of my pocket money every month - I want you to trade on your Forex account with it and earn more for me to enjoy." I sat there speechless when he placed a small bundle of notes in front of me and said, “To begin with. I kept this for the last year out of my pocket money. ”
I can't stop telling everyone about it since then. And I made him profit from the first trade I made yesterday. Like a father, like a daughter – he too has started