In recent times, foreign exchange trading widely referred to as Forex trading, has become very popular amongst individuals. Almost everyone is now an advocate of Forex trading. Whilst the trading in the foreign exchange market has the potentials of increasing one’s wealth, it is necessary and pertinent to have general knowledge about what the market is and how it functions.
Foreign exchange, popularly referred to as forex, is the exchange of one currency for another currency. Hence, Foreign exchange market is an international and a global market where currencies of several countries are traded. The foreign exchange market is traded 24 hours a day, 5 days a week.
As visibly noticed, the currency of one country will have a different value from the currency of another. Due to several factors which include the economic policies, demand and supply of the currency, etc., the value of the currency of a country with better economic conditions will have more value than that of a country with a less favourable economic conditions.
When trading in the foreign exchange market, the currencies traded are listed in pairs. For instance, a pair listing of Nigerian Naira to the United States Dollar could be quoted as NGN/USD. Also, a pair listing of ZAR/CAD means the South African Rand vs Canadian Dollar. This pair listing is to state the worth or value of a country’s currency in comparison to another country’s currency.
In the FX market, a price is always linked to each pair listing as this shows how much it will cost to buy a country’s currency. For instance, if the price linked to the ZAR/NGN is 23.11, this means that it costs 23.11 Nigerian Naira to buy 1 South African Rand. Similarly, a price quote of 475 for USD/NGN means it will take 475 naira to buy 1 US dollar.
Due to the numerous trades from several countries around the globe, the foreign exchange market is inherently volatile. The prices of these currencies traded in the market change very quickly in response to several factors. Factors that may affect the price of a currency are but not limited to: geopolitical events, economic policies, government policies, macroeconomic variables (inflation rate, interest rate, unemployment rate, etc.).
Hence, foreign exchange trading involves a lot of speculation. As a forex trader, you need to have a big-picture understanding of the economies of various countries as this will strongly place you at a vantage position in determining your speculations. Several losses and gains come with the speculation, thus, the better your speculations, the greater your gains; the greater your gains, the more your income grows; the greater the volume of your income, the more successful you are as a forex trader. Thus, if you are considering trading in the foreign exchange market, you must bear in mind that a lot of risk comes with the trading. You must be ready to bear the risk and lose some money. However, with the relevant knowledge, your successful trades should cover up for the losses incurred.
As analysed, it is not just enough to be good at speculation, it is also very necessary to have the relevant information and knowledge. To stay abreast of recent happenings around the world and make analysis of how these happenings can impact the prices of the currencies.
Having known that the foreign exchange comes with a lot of risk to be borne as a trader, it is imperative for you to understand these risks and the recommendable means to hedge these risks.
In the coming weeks, we will discuss the major foreign exchange risks to be aware of and the possible ways to hedge these risks.
Join us as we embark on the journey to financial freedom.
Thank you for reading.