You must have heard or have seen advertisements about traders making millions of dollars through Forex trading. It is time we should know some basic about it. Indianmoney.com proudly presents this article covering all the aspect of Forex Trading. Points to be covered:
Forex trading stands for Foreign Exchange Trading. It is the largest financial market in the world in terms of size as well as liquidity. By liquidity I mean the availability of ready sellers and buyers. The daily worldwide trading of Forex is over $4 trillion. Forex trading is always done using a Currency pair i.e. any trade in foreign exchange market would involve the simultaneous buying of one currency and selling of the other. This forex trading helps to determine the relative value of any currency pair.
For more information on what parameters to look at while selecting the currency pair, feel free to talk to IndianMoney.com Financial Education Helpline on 02261816111 or Visit IndianMoney.com
If traders are buying one currency relative to the other, that particular currency would appreciate. Sold currencies would depreciate with respect to the bought currency. The currency moves by the simple logic of demand and supply. This demand and supply are affected by various factors like the economic, political news, interest rate, unemployment etc which is covered later in the article.
Forex trading is mostly done through Over the Counter platform. OTC is basically a mechanism where traders quote their individual ask (sell) and bid (buy) price. An ask price would always be greater than the bid price. So one can chose the best from the given set of options. The larger is the volume of trade, the better ask and bid spread one gets .Spread means the difference between ask and bid price. Earlier Forex trading was limited to Central Banks, Wealthy Individual and Big companies. But with the advent of Internet even retail investors can trade on currencies.
You may also come across another word called ‘PIP’ when you do any currency trading .A pip is a smallest change in the exchange rate. For 1.2003, the fourth digit after the decimal is the Pip. Only Japanese Yen has a different representation for pip where pip stand for 2nd digits after decimal.
If one wants to buy or sell currency derivatives, they need to do it in Lots. A Lot is a representation of a Standardized quantity of financial instruments. There are various kinds of Lot sizes.
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One more important characteristic to know about forex is the amount of leverage available to traders. The level of leverage can go as high as 500 times of your deposited money. So if you have $1 available in your account you can trade for $500 dollars. But the higher the leverage you take the higher the risk you are exposed to in case your trade do not give expected results.
There are three main strategies for Forex trading similar to Stock market:
i. Technical Analysis:
This method involves analyzing the movement of various currency pairs through various graphs and charts like moving averages, support, resistance, etc.
ii. Fundamental Analysis:
This method involves going through the various fundamentals of any pair of economy like Deficit, GDP growth etc as well as reading various reports on the current economic condition, future prospects and then make an informed decision about what you might be trading.
iii. News or Event driven :
If there is some good news about any economy the currency is likely to appreciate and vice-versa. For example after the Hurricane Katrina in USA, traders sold their dollar holdings in response to expected problem for US economy leading to depreciation of dollar value.
To select the best strategy for your investment you can talk to IndianMoney.com Financial Education Helpline on 02261816111 or Visit www.IndianMoney.com
See Also: Benefits of Forex Trading
Let us take a simple example to show how one makes profit from the Currency Trading:
Let us assume 1 Euro = 1.3056 USD. Now the trader expects USD to go up or appreciate. The trader then buys USD using 10000 Euros and he/she gets 13056 USD. If the dollar appreciates to 1.2234 for 1 Euro, then for the same 13056 USD, he/she can sell for 10671.85 Euros. So the Net Profit would be 10671.85-10000 = 671.85 Euros. For buying this 13056 USD, the trader need not have 10000 Euros in the account, if the trading service provider is giving a leverage of 1:200 then the trader need to have just 50 Euros in the account but the service provider might ask for a certain minimum deposit to be in the account in order to compensate for the risk they face in case of a default by the trader.
All International businesses have to face Currency fluctuations for International trade. With globalization the risk has further increased the inter-dependence among companies of various nations and the exposure to currency fluctuations has further increased. Many Indian companies who are importing goods and services have reported losses because of high rupee depreciation with respect to dollar. Recently one Indian company Eclerx reported significant decrease in Net profit mainly due to the Forex exposure. These companies could hedge against the forex exposure by buying forward or futures contract. Forward and Futures contract are financial instruments where you can long or short (buy or sell) the future contract based on the expected future currency price.
Forex trading is allowed in India but with regular RBI intervention. The interventions have been in the form of monetary policy (interest rate) as well as limiting the direct purchasing and selling of foreign exchange to limit the rupee fluctuation. If the rupee starts depreciating with respect to dollar, the RBI would sell Dollar to check the fall. Currently the daily forex trading in India is over $450 billion.
There are several companies facilitating Forex Trading, we have mentioned a few of them:
1. SBI FX Trade:
State bank of India provides trading in four currencies pairs which are USD/INR, EURO/INR, GBP/INR and JPY/INR as permitted by SEBI and RBI. The trading hours are from 9 am to 5 pm from Monday to Friday.
There are different types of accounts here:
Admiral. Standard- The minimum deposit required in $500 with 30 pairs of currency and having a leverage of 1:500
Admiral.pro – The Minimum deposit required is $1000 with 27 pairs of currency with a leverage of 1:100
Minimum deposit of $250 with leverage of 1:200
In order to find out which service provider to choose and get the best deal, please call IndianMoney.com Financial Education Helpline on 02261816111
Most traded currencies: They are ordered based on their liquidity with EUR/USD being the most liquid among the seven,
These are the top 10 Currency traders as of May 2012 based on their Market Share:
To know how can you decrease your risk while doing forex trading please call IndianMoney.com Financial Education Helpline on 02261816111
1. Interest rate
According to the International Fisher effect, the difference in the Interest rate among the two countries is reflected in the Exchange rate. The currency of the country having lower interest rate is expected to appreciate with respect to the other currency of the pair.
2. Inflation Rate
The Currency of the country with lower Inflation rate is expected to appreciate in respect to the other currency. It is based on purchasing power parity i.e. the people in the country with lower inflation is able to buy greater amount of goods & services than the country with higher inflation with the same amount of money.
3. Balance of Payment
In simple language it represents how much a country is receiving from its exports of goods, services and other kind of investments and how much a country is paying for the mentioned or imported items. In case the import is much higher than the export that particular country will have to borrow money to pay its creditors, this lead to the devaluation of that particular currency.
4. Stable Political Environment and Economic Performance
They are a catalyst in taking the exchange rate for any country up or down. Swiss franc is considered very safe in regard to this particular factor.
5. Geographical or Natural calamities
These events also play a crucial role in exchange rate fluctuations. For example in the aftermaths of the Earthquake and Nuclear reactor disaster in Japan in 2011, the Japanese yen rose as high as 80 compared to Dollar whereas in ordinary course of business it fluctuates around 75-76 during that period.
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