Essentials

Is Forex Trading For You?

During my university years I was introduced to forex through a mutual friend who was trading online through a platform called Avatrade.

I was intrigued and he advised me to do my research, watch tutorials online and attend forex seminars before committing myself. Be advised that forex trading isn’t for everyone, if it were, we would all thrive trading and become rich.

A young South African man named Sandile Shezi took the forex industry by storm making millions trading online. Suddenly everyone wants a piece of the “forex pie” (a huge pie I must say) over 1 trillion US dollars is traded online daily around the world.

For those who are looking to trade let’s get into it:

What Is Forex ?
Forex is short for foreign exchange, but the actual asset class we are referring to is currencies. Foreign exchange is the act of changing one country’s currency into another country’s currency for a variety of reasons, usually for tourism or commerce. Due to the fact that business is global there is no need to transact with most other countries in their own particular currency. After the accord of Bretton Woods in 1971, when currencies were allowed to float freely against one another, the of the individual currencies have varied, which has given rise to the need for foreign exchange services. This service has been taken up by the commercial and investment banks on behalf of their clients, but has simultaneously provided a speculative environment for trading one currency against another using the Internet.

Forex As a Hedge
Commercial enterprises doing business in foreign countries are at risk, due to fluctuation in the currency value, when they have to buy goods or services from or sell goods or services to another country. Hence, the foreign exchange markets provide a way to hedge the risk by fixing a rate at which the transaction will be concluded at some time in the future. To accomplish this, a trader can buy or sell currencies in the forward or swap markets, at which the bank will lock in a rate, so that the trader knows exactly what the exchange rate will be and thus mitigate his or her company’s risk.

Forex As A Speculation
Since there is constant fluctuation between currency values of the various countries due to varying supply and demand factors, such as: interest rates, trade flows, tourism, economic strength, get political risk and so forth, an opportunity exists to bet against these changing values by buying or selling one currency against another in the hopes that the currency you buy will gain strength, or the currency that you sell, will weaken against its counterpart.

Currency As An Asset Class
There are two distinct features to this class:

  • You can earn the interest rate differential between two currencies
  • You can gain value in the exchange rate

Why We Can Trade Currencies
Until the advent of the Internet, currency trading was really limited to interbank activity on behalf of their clients. Gradually, the banks themselves set up propriety desks to trade for their own accounts, and this followed by large multi national corporations, hedge funds and high net worth individuals.

With proliferation of the Internet, a retail market aimed at individual traders has sprung up that provides easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market.

Pros and Cons Of Trading Forex:

  • The forex markets are the largest in terms of volume traded in the world and therefore offer the most liquidity, thus making it easy to enter and exit a position in any of the major currencies within a fraction of a second.
  • As a result of the liquidity and ease with which a trader can enter or exit a trade, banks and or brokers offer large leverage, which means that a trader can control quite a large position with relatively little money of their own.
  • Another advantage of the forex markets is the fact that they trade 24 hours around the clock.
  • Trading currencies is a macroeconomic endeavour. A currency trader needs to have a big picture, understanding of the economies of the various countries and their connectedness in order to grasp the fundamentals that drive currency values.

Two Ways To Approach The Forex Markets

  1. Currency trading has been promoted as an “active traders” opportunity. This suits the brokers because it means they earn more spread when the trader is more active.
  2. Currency trading is also promoted as leverage trading and, therefore, it is easier for a trader to open an account with a small amount of money than is necessary for stock market trading.

Bottom Line
For most traders, especially those with limited funds, day trading or swing trading for a few days at a time can be a good way to play the forex markets. For those with longer-term horizons and larger fund pools, a carry trade can be an appropriate alternative.

In both cases, the trader must know how to use charts for timing their trades, since good timing is the essence of profitable trading.

To get started you can visit trading platforms like:

www.webtrader.standardbank.com
www.avatrade.com

Source: Investopedia

Join the discussion

  1. Lindani

    Thank U I now can become more investment savvy

  2. Debroah Flamer

    Nice post. Do you have any other ones you can stick? I love the content. 🙂

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