Forex or Foreign exchange is often perceived amongst investors as a good money-making opportunity. It owes that perception to easy accessibility, 24/7 availability, high liquidity and on the spot information that is always available. It has become a popular choice for people who are willing to make quick and easy money and that too in the short run. However, they could not be more wrong about this, things might look so great from the top, but when you come to the actual trading, the picture does not seem so great. Even though forex is a highly engaging activity, but it is not so easy as people often perceive it to be.
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So, what is the Forex Market?
Foreign exchange or the forex market is the marketplace where all the major global currencies are traded. It is the place where buyers and sellers get together, and they trade amongst themselves involving different local and foreign currencies. Every country has some or the other type of forex market like Forex Trading Australia as they are essential for any global or business-related activities to take place within that country. The forex market also happens to be extremely liquid and volatile as well. This marketplace operates for five days a week for 24 hours throughout different major financial centers.
So, if you are looking to invest in the financial market and take advantage of the financial opportunities, here are the things that you could do:
The choice of whether to Buy/Sell:
There are not many financial markets that offer you a wide range of opportunities, as the forex market does. You always have the option of going for whether to buy or sell. It is up to you if you want to go long or short by using derivatives. This is true because if you are going long (meaning that you are buying one currency), then it means at the same time you are selling the other, or financial terms are going short. If you feel that in the future the currency that you are buying will appreciate, then you can buy more units of it whereas you would go short (or sell it) if you expect the currency to fall or depreciate in the future. This process of buying and selling goes on throughout the days as investors try to hedge and make a profit over the fluctuations that happen in the value of the currencies. Your profit or loss entirely depends upon you and to the ratio as to how much you got your predictions and expectations right. These forces are one of the factors that determine the value of the currency.
The forex market operates for 24 hours, five days a week. It is a decentralized market, meaning it exists and operates without the influence or laws of a central forex body or a marketplace. Instead, they are governed by the laws the land they operate in as well the members who are part of it. Furthermore, because of the decentralized nature, the forex market can operate 24 hours nonstop through different financial centers located all around the world. So, by the time the New York forex market closes, the markets in Sydney and Tokyo start their operations. This means that no single marketplace can dominate and govern the market completely and that trading occurs throughout different phases and times of the day.
As such, you can take advantage of different times and sessions throughout the day.
The foreign exchange market is one of the most highly liquidated markets in the world. There are constant buying and selling taking place. And at any given time or moment of the day, there are hundreds and thousands of transaction which are being processed and settled. The global daily trading average for foreign exchange markets stands at a mammoth value of $5.1 Trillion whereas, for the stock market, it stands at a mere $ 212 Billion. Each day, the marketplace is flooded with individuals, companies, and banks who are willing to invest and trade in different foreign currencies to generate a profit. Various factors have vastly contributed to such high liquidity of the foreign exchange marketplace, and some of them include the availability of on-time information, low transaction costs, and quick transaction process. The result of all this is that it has created an environment where risk-averse investors are now willing to speculate and take risks on their investment so that they could earn a profit because of the price movements
Fluctuation and Price Volatility:
It would be an understatement to stay that in the forex market billions of dollars are traded every minute even as we speak. The forex market has allowed traders to buy and sell at their ease and that too, without any restrictions. This ease of doing business has made the forex market an attractive opportunity for investors who are willing to invest billions of dollars to make quick profits. Such investments have resulted in the marketplace becoming extremely volatile. There are frequent price movements that can go in any direction and you can reap huge profits if your estimates and speculations are right.
However, the problem with the zero-sum game is that sometimes it works for you and other times it does not. It is a double edge sword, which can go any time against you, so you should minimize your risk and limit your exposure. Even though the profits of the fore market might be high but so too are the losses.
Diversifying your Risk:
The forex market is the market where all major currencies are traded. It lets you avail of the opportunity to trade in different currencies at the same time as well. However, what makes the forex market exciting is also the cause of its concern as well. This problem of volatility and price fluctuation can nevertheless be resolved through hedging as you can mitigate your risk and increase your profits. Hedging allows you to trade in two positively correlated currencies whose movements are opposite to each other, and as one currency increases the other fall. This leaves you with a strong position regardless of the moments in the market, and you can take a long or short position depending upon the scenario and situation in the market. Moreover, your risks are diversified, and your losses are minimized, which leads you being a winner in every situation.
The forex market is a great opportunity for you to engage and make money out of it. However, it comes with its baggage. Although most people get attracted by the high returns the forex market offers, it is equally important to be aware of the losses as well. These losses can never truly be eliminated yet by being cautiously and treading carefully, and you can mitigate them and hopefully avoid them as well.