Trading is an exciting activity. Whether you make money or you lose it, it never fails to catch your attention. The reason it is so popular amongst people is that its potential of making big money. The professional traders often spread the stories about how they have made their fortune in trading in a short time. There are many traders who boast about their successful trades but the statistics suggest that only a handful of traders, 2% to be precise, make money in trading. The other way of interpreting this stat is that 98% of the traders lose money. That sounds scary, isn't it? In India, trading is usually done in equity, commodity and currency market. These are different asset classes. Amongst these three, Currency, better known as Forex Trading, is little different than the other two. Forex is a universal market where all the traders across the world trade.
Let's shed some light on the forex market and try to understand its potential and what traders/investors stand to gain from it.
What Is Forex Market?
The forex market is the platform where all the currencies of the world are traded. In the international trade, currencies are important. For the businesses and consumers around the world as currencies have to be exchanged in order to carry out international trades and business transactions.
Let's demonstrate this point with the help of an example. Suppose you are in India and you want to buy an iPhone from the USA. As you are buying the product from the US market, one of the parties involved in this transaction i.e either you or the merchant you are buying iPhone from has to make the payment in US dollars (Currency of the US). What it means is that the Indian importer of iPhone will have to pay the equivalent value of Rupees (INR) into US Dollars.
In the same line, if an Indian tourist is travelling in Africa, he/she would be unable to make transactions in Rupees as it is not a local currency. In order to make their travel experience hassle-free, Indian tourists will have to exchange Indian rupees for the local currency, in the case of South Africa, it would be Rand.
This transaction illustrates that two currencies were exchanged to procure a certain commodity. The above-mentioned example was about a retail transaction. There are many high volume transactions that happen between countries every day. As different currencies change hands on the day-to-day basis, the value of these currencies keeps fluctuating. This daily price movement is what triggers the trading in the Forex Market. All these points where travellers, traders, merchants feel the necessity to exchange currencies is the very driving force of the forex market. As a result, many currencies are exchanged in the international market and subsequently creates a demand-supply equation which ultimately stimulates forex trading.
Transactions like these which happen across the world at a huge volume create a demand and supply for certain currencies. As a result, the value of these currencies goes through price fluctuation.
The forex market is the biggest and the most liquid financial market in the world. The market size of the forex market makes other big asset classes like equity market and the commodity, which attract high volume every day, look smaller in comparison.
Forex Market Is A Global Market
The fundamental difference between the forex market as compared to stock and commodity market is that the forex market, being an international market, does not have a central exchange as it is Nifty, Sensex for equity and MCX for commodities.
In forex, all the traders are on a network which connects all the traders across the world on a digital platform. Due to this, there is no requirement of a centralised exchange. Also, trading is conducted electronically over-the-counter (OTC).
Another interesting thing about forex market is that it is open 24 hours a day for the five and a half days of a week. All the currencies are traded across the world. However, the main markets for forex are London, Hong Kong, Tokyo, Zurich, New York, Paris, Frankfurt, Singapore and Sydney - across all the time zones. This simply means is the time when a trading day in the U.S. ends, forex market starts again in Tokyo and Hong Kong. As it is traded across the continents all the time the forex market is able to stay highly active any time of the day, with price quotes shifting on the constant basis.