Often times people think that forex is soley for trading whether online or with the banks. What people don't know is that their are multiple aspects to forex that are overlooked. Knowing these can help you overall have a better understanding on how to trade and if it is right for you!
This article will bring down those points and help you get a clearer picture.
What is Forex?
“To travel the whole world” is often something many people often dream of!
We all have a little wanderlust and often want to experience new places!
New places often brings new adventures and opportunities. Sometimes we are struck with bad luck and even on the most joyful trips the problem is often with the cash; we might not always have the currency of the country we are traveling to.
This is why understanding the forex markets can come in handy. Most people think that Forex is simply for trading. They are wrong!
It's a huge platform for currency exchange, trading, tourism or commerce.
Why choose forex?
- Ability to predict going for long term or short term: Forex provides you with options so you can predict if the quoted currency is going to either increase or decrease; hence you can decide whether to buy or sell your base currency.
- 24-hour market: The time difference between countries and the market being closed at night can cost us a very profitable deal, hence the market is open 24 hours.
- High Liquidity: There are several buyers and sellers who work with Forex and have made quick transactions, thus making transaction costs very low.
- Wide range of currency: Forex works with a wide variety of currencies, and hence there is more profit.
What kind of participants do we find here?
- Forex Dealers: The most significant participants are the dealers or the broker-dealers; they constitute the majority of the market. These are usually the banks; there are some non-financial dealers as well who use their capital for the tradings. These dealers participate in the bid and ask for currency pairs.
- Brokers: They act as a helping hand to the client, enable him to obtain more profit by advising them about where and how to trade. Usually, the market is devoid of them; if the person has the knowledge, they can contact the dealer directly. They are also the reason for the fluctuation in the market.
- Hedgers: These protect the firm against the losses caused due to assets or liability brought in foreign currency. They will minimize the losses due to the currency rate changes by using future contracts.
- Central banks: Many of the central banks participate to some extent, sometimes officially and sometimes through some means; they do this as they want the fluctuation of currency in some limited range, as huge fluctuations can cause losses.
- Retail market participants: This includes Normal people like tourists, students, small businesses, etc. These constitute a very small part of the market and are not very active.
Some of the disadvantages
- Highly influenced by brokers and hence they dominate the market, it is mainly because it’s decentralized. This can cause the market to be very untransparent.
- Price determination of the foreign currency is based on many factors that are taken into account through technical analysis, which is not adequate. Hence, the estimation of profit or loss may not be correct.
- High leverage means high risk; if the estimation is not correct, the investor can face huge losses.
- High volatility is a big risk as well as an advantage; the global policies can change anytime for good or bad.
To end off,
Forex is for trading. It has many advantages, and the most favorable one is that it works globally with a wide range of currency, hence a perfect fit for all your trading activities.