With the fast progress of human civilization and technological advancement, the idea and definition of trading and market have also broadened. After the industrial era, these words are just not defined as they used to be.
When we hear the phrase market instead of a market place, the stock market rings a bell. And when the word trading comes to our mind? Maybe a financial trader who is rolling dice in the stock market. And now, the most significant global market is the Foreign exchange market, also known as the forex market.
At this point, you must be wondering then what Forex trading is? Or how does it works? So, in this article, we will explain what is forex trading for beginners.
What is Forex trading?
The forex market is one of the biggest decentralized global markets in the world. The forex market is a market for trading foreign currencies. It also determines the rate of exchange of currencies of all the countries. It involves all factors of selling, buying, and exchange of currencies at present or plan prices of it. In terms of trading amount, it is by incomparably the biggest market in the globe.
So Forex trading is foreign exchange trading, which means the exchange of foreign currencies, which means buying or selling one currency for another. Many of us have experienced forex trading ones either electronically or physically. For example, if you are going for a trip to the USA, you would need to sell your local currency for the currency of the USA, which dollars. This exchange is also a kind of forex trading. But forex is mostly done by central banks, banks, corporations, and retail traders on a larger scale.
Types of Forex Trading?
There are three major types of foreign exchange trading, and they are:
- Spot forex market: A spot forex market is a fast transaction that involves sales and purchase of currencies. These transactions usually take place within two to three days of an agreement.
- Forward forex market: A forward forex market is a transaction (sales and purchase) of foreign currency that takes place in the future, and the date of transaction settles according to the contract.
- Future forex market: Future forex market is similar to the forward forex market but not the same. In this process of transaction, payments, and deliveries, both take place in the future.
Spot forex market
The Spot trading market is the one where the trading of currencies settles within 48 hours. This market function consistently, nonstop. Unless there is a holiday, a spot exchange that affects on Monday will be resolved by Wednesday. A specific timeframe is essential for this transaction’s settlement due to the difference in time zone around the world. The rate of this transaction is called the spot exchange rate. According to the Federal Reserve, the spot market represents 33% of all currency exchange. There is an estimation that the banks operate 90 percent of the spot transaction exclusively. The rest are there to satisfy the orders of the essential enterprises who are the clients of the bank.
Primary members on the spot exchange market are:
- Central banks.
- brokers, arbitrageurs, brokers, Dealers, and speculators,
- Commercial banks,
Forward forex market
The transaction in the forward forex market usually takes place sometime in the future. It is generally after 90 days of a deal between two parties. After 90 days of an agreement, two parties ( buyers and seller) of currency enters a contract at a fixed rate of exchange. This process is a forward transaction.
Therefore, the forward market governs forward transactions in foreign exchange. And the rate at which the buyer and seller of a currency fix the deal is the forward exchange rate. The spot and forward markets are the fundamental sorts of foreign exchange markets that usually support maintaining the foreign exchange rate.
The forward market fundamentally deals with the popular currencies which have demand and frequently use for international trade like the US dollar, Canadian dollar, Pounds, Italian lira, French franc, Swiss franc, etc. There is a very insignificant forward market for the currencies of developing nations.
There are two divisions of the forward market.
- Outright Forward: Outright forward market operates like spot forward market but takes a long time for the transaction to take place
- Swap market: The swap market consists of borrowing and lending in the market.
Future forex market
A Currency Future contract involves delivering or taking delivery of a given amount of currency on a specific future date at a fixed price on the period of the contract. The execution of future exchange is set at a later date. Yet future contracts are different than forward contracts in numerous ways.
The major differences are
- Organized Exchanges
- Minimization of variation
A standardized futures contract to buy or sell currency at a specific time, date, and size of the contract is the future forex market. The contract of the future forex market is forex future, which is distributed around the world and publicly traded. These contracts are none customizable and have a standardized size of the contract. They are also guaranteed against credit losses by a mediator known as a clearinghouse.
The volume of trade is significantly small in the future market than in the forward market. Yet it is holding a vital position in The United States and The United Kingdom. And the growth of it is also significant.
Any form of trading can be profitable and also can cause a loss. If you see forex trading as a triangular higher archy figure, then you and I, who are the retail traders, will take the position at the bottom. And Forex market is only moved by the participants who are above you, and I like the banks and the corporations. When there is a will, there is away.
Forex trading has high liquidity, and very few barriers to enter the market. You can enter the market anytime. You can also have better risk management because the amount of investment can be small to high, so you must invest wisely. You can do the trading anytime you want since forex is always function. If you can use these factors wisely and not be afraid of loss and also have patience, then you never know you might make a fortune.