Trade Forex
Introduction
When we ask, “What is Forex?” Many newbies will answer, “Foreign exchange.” Or if you want to sound academic or geeky, the answer will go like “Forex is the exchanging of currency of one country for that of another country. For instance, you sell your Canadian Dollars (CAD) in exchange for Japanese Yen (JPY), etc.” Brilliant answer here. But really? When you say you want to become a ‘forex trader’, is that what you signed up to do. Or is that what you are going to be doing? When we recommended the list of trading arsenal for newbie traders, we recommended MetaTrader 4, ForexFactory, and that you sign up to our winning forex trading signals. All these are software that will be installed or accessed on your laptop or smartphone. Even more confusing is the fact that your ‘forex brokers’ or ‘dealers’ are all virtual and may be located in another country or continent, and that you may never meet them physically.
All these confusions exist because we (and this includes experienced traders) often confuse the physical and electronic markets for the forex market, and an understanding of the fundamental differences between both may help us interact with the market better.
Physical Market
The physical market involves the actual exchange of one’s currency for another country’s. So essentially you give up for Japanese Yen and in return receive the Canadian Dollar at the rate of ¥80 to about C$1. But realistically, there is no reason for which you will buy Canadian Dollar or another country’s currency for that matter if you are not travelling or conducting any transaction that will involve actual exchange of foreign currency. If it is for speculation purposes, then it is not really the best investment. For one, the rate of return is really not worth it. Using the CADJPY example, the Japanese Yen has only ranged between ¥73 and ¥85 over the past 12 months (June ’19 to June ’20).
If you happen to buy C$500 with Japanese Yen at a ‘lower’ rate of ¥75 for each Canadian Dollar (equal to ¥37,500), and then sold at the 12-month high of ¥85 (equal to ¥42,500), you will pocket a profit of roughly 13%. Not bad, but still not great.
Apart from this however, there a still risks of damage, theft and above all, it requires large capital if you want to eke out any returns. It is mainly governments, central banks, and multinational and other companies that are involved in dealing with physical currencies for purposes other than travel and transacting.
Electronic Market
Sometimes known as the financial market, the electronic market foreign exchange market involves dealing with international currencies, virtually; you don’t have to touch any foreign currency. Everyone – retail and institutional traders, as well as hedgers, all play in this type of market. Retail traders (you and I and several millions of others globally) are mostly involved in this market for the purpose of speculating, and we do this by attempting to make profits from predicting price directions – so when we predict that one currency will appreciate against another, we bet that currency against the other, all virtually. In essence, when you see a forex trading signal that says “Buy EURUSD”, it does not mean that you have to buy actual Euro and sell the US Dollar. It only means that you are betting that the Euro will appreciate against the Dollar.
There are however numerous ways through which you can play in this market, and they are collectively known as Derivatives, in that they derive their value from the price of an actual asset, in this case, the currencies of nations. They include, but are not limited to Futures, Options, ETFs, CFDs, and Spread betting, amongst others.
- Forex Futures
Forex Futures are agreements between certain parties to buy or sell a currency (forex) at a future date, hence why they are called “futures.”
In essence, forex futures agreement contains the price at which the currency will be bought or sold, and the particular date in which the exchange will be done. You profit from the market if your prediction of what the market will be at that particular date or period turns out accurate.
- Forex Options
Forex options give the trader the “option” to buy or sell currency pairs at a stated price on a particular date. Just like in futures, you make money when your prediction turns out correct.
Now, futures and options may sound pretty similar, right? They are not. In the forex futures market, the trader has the obligation to fulfil the terms of the agreement on the agreed date, that is, to buy or sell the forex pair. However, in options, the trader has the option but not the obligation to.
- Forex ETFs
Just like stock ETFs, forex ETFs essentially track the performance of an underlying currency or group of currencies, and their value moves in tandem with these underlying currencies. So an ETF that tracks the dollar will increase if the Dollar increases and decrease when the Dollar does same.
- Forex Spread betting
Forex spread betting essentially involves taking a bet on the direction of a currency pair. Your profit (or loss) from this depends on how the market moves in (or against) your favour and the amount that you bet.
- Forex CFDs
CFD is by far the most popular method of trading forex electronically, and that is what we are going to trade. Forex Contracts for Difference (CFDs) basically entail profiting from the difference that happens in prices of underlying currency pairs. Here, what the trader is concerned about is the movement or change in price at a period in time. These price changes may actually be minute or even negligible but as a result of massive “virtual” leverage offered by brokers, you can magnify returns.
As a result of the leverage, CFD trading is highly risky as traders can possibly lose most or all of their accounts.
Which Electronic Method is Best
Successfully answering the question of which is the best will depend on a number of factors such as investor risk-appetite, regulation in your country and the size of your capital. However, if we are to recommend, we highly advise you choose CFDs, and you can start trading and earning big right away with trusted forex signals.
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