Key TAKEAWAYS
Currencies are traded in pairs, say USD/INR i.e. US dollar and Indian Rupee. The associated price with the pair is 74.38 which means it’s going to take 74.38 rupees to buy 1 US dollar. Traders speculate on the price movement of the currency and trade currencies to create profit.
What is Forex?
Forex is a frankenword for Foreign Exchange and refers to a marketplace where currencies and their derivatives are traded. Forex market is said to be the most liquid market in the world with a very high trading volume. It operates online as the network of traders, brokers, banks & financial institutions, and not only this but trillions of dollars are traded every single day in Forex.
Forex is open 24/7 and five days a week except for the public holidays. Several traders speculate on the price movement of many currency pairs to create profits.
How to trade in FX?
Forex market is now accessible to everyone who wants to start trading in it, unlike the old times when it was only open to governments, banks, and bigger institutions. Many brokerages, investment institutions allow individuals to open an account with them to trade in Forex.
While trading in Forex, currencies are traded in pairs which means a trader is going to own either of the currencies. When they are buying one, they are expecting it to rise and selling the one they believe is going to depreciate.
In electronic trading of currencies, there is no physical exchange of the currencies but an electronic one and a trader create a profit from the price differential of both the currencies they are trading in.
Currency trading is always done in pairs. When a trader is selling one, they are ought to buy another.
Spot Transactions
A spot transaction allows immediate settlement of the transaction. Generally, the settlement period is of two days in the Forex market. However, it can vary due to holidays. The exchange of funds between two parties occurs on the settlement date and not on the date of the transaction.
What is Forex Rollover?
When a trader is only interested in creating the profit and not in taking the delivery of the currency, they hold the position and do not require settling the transaction. They generally hold the position with a rollover and thus when a trade is closed and settled, the gain or loss from the rollover is added to the transaction.
However, day traders usually don’t hold a position overnight and close the trade before the end of the day.
What are Forex Forward Transactions?
Transactions that are settled on a date other than the spot transaction date are termed as Forex Forward transactions. Adjustment is carried out on the price of the currency paint and is known as forwarding points which reflect the differential of interest rates in both markets.
A Forex Forward transaction is a contract meant to be settled on any date other than a weekend or public holiday and can be created for any amount of money.
What are Forex Futures?
Forex Futures are contracts meant to be settled on a specified future date similar to a Forward Forex transaction with the exception that the date of settlement is non-negotiable. The date on which Forex Futures are obligated to be settled is known as the Expiry date. A set amount of currency is exchanged on the settlement date between both the parties and a trader creates a profit from the price differential in buying and selling the Forex Future contract. Traders make speculations on the price of the contract and generally do not hold the contract until expiry.
How is the Forex market Different?
The forex market has some key differences from other financial markets. Here are some highlighted differences that a trader needs to know about:
How does Forex work? – Example
Let a trader ‘x’ choose a currency pair of USD/INR to trade-in. They buy US dollars to trade with Indian Rupee when the value of the US dollar appreciates. If they buy $10000 worth of currency and the US dollar appreciates by 0.0065, the net profit of the trader would be ($10000*0.0065= $65) and if the price drops with the same amount, they would be losing the same amount of money.
As the price of currencies keeps moving, there is high volatility in the Forex market and if a trader decides to hold any position overnight, the broker rollovers the position which results in the effective credit or debit from the traders’ account depending on how the currency performed in the rollover period. Depending upon the rise and fall of the currency, the associated interest rate with currency is credited or debited in the traders’ account along with the net profit credit and net loss debit.
Rollover can be game-changers if a rollover position is held for too long resulting in higher interest rates along with currency appreciation or depreciation.
Brokers also allow traders to use leverage amount that is much higher than what they have in their trading accounts which means a leverage ratio is 20:1 allows traders to trade on $20 worth of currency with $1 in their account. This is an attractive side of using leverage by a trader but there’s also a downside to it. In case the trade doesn’t go well, the trader is ought to lose all of their money in the account.
CONCLUSION
Trading in the Forex market seems attractive and interesting to many traders, however, only a handful of them master the art of trading in this volatile platform. Keeping emotions out of the game and keeping oneself on the right side of the trading curve is crucial to make a successful trade. It is highly recommended for traders to manage positions strategically to reduce net losses and magnify net gains.
Day trading is indeed a lucrative career but also a challenging one. Before a trader enters in the market, they should be equipped with the knowledge of the trading world and possess risk tolerance ability along with a good amount of capital and a clear goal.
A day trader is someone who capitalizes by carrying out long and short volume trades on the fluctuations in the market price action.
Day trading refers to a practice of buying and selling a security within a day. This can be seen at various marketplaces but it can be most often seen at stock markets and foreign exchange (forex).
