Fast-moving and ever-changing: welcome to the world of the Forex trading in Zimbabwe!
An In-Depth Look at What the Forex Market Is, Its Importance, and How to Get Involved in It
As of April 2016, the Forex market trades more than $5 trillion daily, a number that hasn’t seen a significant change in the last four years. This is according to the BIS Triennial Central Bank Survey. The survey is the most complete collection of information about the structure and size of global OTC (over-the-counter) derivatives and foreign exchange markets. It is organized by the Bank of International Settlements (BIS), a bank serving central banks, in the aim of promoting transparency to help market participants have a better means of monitoring activities of financial systems across the globe.
The central bank survey brings to mind one question. Why is it important to create a survey such as the one they did?
Importance of the Global Forex Market
The huge amount of money involved makes Forex market the largest financial market in the world. It is arguably one of the most important vehicles of international commerce. Through it, countries are able to import and export goods and services, creating additional resources and global demand for local products. More importantly, it enables companies to reach farther prospects and foster global economic growth.
Aside from international trade, the Forex market is important in global investing. Currencies are traded for buying and selling of securities and foreign assets, allowing investors to internationally diversify their financial portfolio.
The central bank’s survey helps in all of these by making it easier for policymakers to create rules and regulations that would promote growth and improvement on global investing and how money, goods, and services are traded between countries through the Forex market.
Defining the Forex Market
Forex, short for foreign exchange and abbreviated as FX, is a financial market where international currencies are traded and exchanged. It is not to be mistaken for an exchange, which is a marketplace where various financial instruments including FX are traded.
Organizations, companies, and individuals need to exchange their local money for foreign currencies specific to the country they are dealing with. In other words, FX is important in foreign business and trade.
In the import and export industry, companies have to buy and sell their products following the foreign exchange rate of the country to which they have a transaction with. Organizations in Asia buying products from Europe have to pay in Euros, or they have to exchange their currencies first before they can complete the purchase of their sellers’ products. Travelers on the other hand, have to exchange their money to the local currency of the country they want to visit. A British traveling to Japan can’t pay in British Pounds to enjoy the famous public hot baths, or onsen, because it’s not the local currency. Tourists have to exchange their money for the local currency, from Pounds to Yen in this example, at the current FX rate.
Financial institutions such as exchanges, Forex dealers, brokers, and banks are always ready to trade and exchange currencies. Banks exchange currencies with one another, often negotiating rates among themselves. Dealers and brokers on the other hand, market currency pairs. They are typically the go-to place by individuals who ask or bid on currencies for trading.
Trading however, doesn’t take place in a single, centralized place. It is typically done online, making it more convenient for traders to access their account wherever they are in the world. On the other hand, the speculative nature of the FX market only allows traders to open and close deals without taking physical possession of their currencies, which are reflected through online accounts.
Identifying Its Advantages over Other Markets
Regardless of the market, an experienced trader can still make money provided that there are many buyers and sellers, enough to create significant trends whether daily, weekly, or monthly. However, the FX market features unique aspects that make it a better form of trading. Here are some of the best known advantages of trading in FX markets.
- Profit Is Not Affected by Market Direction
In the Forex market, a currency pair derivative can be sold even before a trader decides to purchase it. This is called a short or short-sale. It can be profitable if a trader buys back a currency pair derivative for less compared to its original price. The difference between the two prices can become profit or loss.
If rates increase, the sale becomes profitable when the currency pair derivative is bought. If rates fall, it can still be profitable, but only if the currency pair derivative is sold and the bought for less than its default price. Because of short-selling, traders can still make profit regardless of the market trend.
- Volatility and Leverage Opens Up More Opportunities
Volatile markets can increase opportunities to create more profits for traders. The instability is brought about by the fluctuating rates. Traders can take advantage of the fluctuations to buy currencies at a lower cost and sell them at a higher price. However, volatility, the measure of changes in the prices of currencies, is potentially greater in risk.
Also, the Forex market offers increased leverage. With it, traders can borrow money for small investments, but profits well. Stock markets commonly have 1:2 leverage, but the FX market offers 1:100 or higher. Because of this, traders have a greater potential to get more gain. However, like volatility, a higher leverage can be risky.
Despite the risks, traders can still control the amount of money they are prepared to lose. Through a stop loss, traders can set the limit that they are prepared to risk.
- Cost of Entry is Justifiable and Affordable
The difference between and ask and bid price is called the spread. It is typically the cost of trading for most brokers. Compared to stocks trading, spreads in Forex trading costs way cheaper. This makes Forex trading cost-effective. This also eliminates the need for commissions.
Also, brokers require a deposit to allow traders to create an account. Required deposits can be as low as $250, which is affordable for many.
- Easily Accessible
Because trading is mostly done online, traders can access their accounts wherever they are, as long as there is an Internet connection. In a similar way, traders can easily create accounts using their debit or credit cards for funding. Most brokers accept first deposits at a low cost.
- High Liquidity
The size and hours of operation of the Forex market offers high liquidity. This means that traders and investors can enter and exit the market as they wish, more so before rates go skyrocketing prior to the execution of a trade.
Having a large market size makes the Forex market open to a constant supply and demand for currencies. It also discourages a single group to monopolize and manipulate the market.
At the same time, the Forex market is open 24 hours a day. While a financial institution that conducts FX trading is closed in one country, another opens somewhere else.
Understanding What Can Be Traded
Currencies are always traded in pairs. There are four main ones that make up most of the trades in the market, offering high liquidity. They are called the majors. There is the EUR/USD (euro/US dollar) pair, which is the most widely traded one. Others include GBP/USD (British pound/US dollar), JPY/USD (Japanese yen/ US dollar), and CHF/USD (Swiss franc/ US dollar).
Currencies traded with each other that do not belong to the majors are called cross currencies. Like the majors, rates for cross currencies are calculated based on the exchange rate for US dollars. That’s because the US dollar is considered a reserve currency. Almost all countries have their stash of US dollars for foreign trade and business.
Commodities, global equity indices, and precious metals can also be traded. Commodities include corn, wheat, gas, oil, and many more. Precious metals on the other hand include platinum, gold, silver, and others.
- Currency Pairs in Detail
The first currency in a pair is called the base, while the second one is referred to as the counter. Currency buying indicates that a trader is purchasing the base currency, while selling means the counter currency is up for sale. Using the EUR/USD currency pair, an exchange rate of 1.5000 is set as an example. A trader will need US$1.50 to buy 1 euro. On the other hand, if the euro is sold, a trader will get back US$1.50.
If a trader bought 20,000 using the same currency pair, the amount of $30,000 would be paid. 1 euro is worth $1.50 which means €20,000 = $30,000. If the rate of euro increases the following day to $1.51, the trader would’ve earned 2 cents for every euro bought and $200 in total.
However, if the trader wants to sell the purchased euros, the opposite would happen. Considering the euro’s rate increased, that means that the dollar’s rate decreased. By selling 20,000 euros, the trader would lose 2 cents for every euro and $200 in total ($30,200 less $30,000).
Understanding Who the Market Participants Are
There are many market participants in the FX market. Forex transactions range from facilitating business, speculating for profits, hedging risks, to foreign exchange, online trading, and other transactions. In online trading, transactions are done between dealers – the buyers or traders and the sellers or market makers.
Buyers, especially individual traders, are the global FX market’s fastest-growing sector. The number of people interested in online trading is increasing every year. In fact, according to the Corporate Insight 2016 Investor Survey, 44% of baby boomers, 56% of gen X, and 71% of millennials are trading online via their mobile phones. These are big numbers. Individual traders used to make up 6.4% of all the traders worldwide in 2012. For the first quarter of 2017 alone, that number boosted to 21.5%.
On the other hand, other buyers include hedge funds, small banks, multinational corporations, securities dealers, large commercial banks, the inter-bank market, and other financial institutions.
Market makers meanwhile, create a venue in which traders can easily trade in. They are composed of companies that offer bid and ask prices on any given currencies. They get their income from the price differentials of the services they provide such as facilitating trade, reducing costs of transactions, and liquidity.
The Most Appropriate Time for Trading
The FX market is open and available worldwide. This dictates the time when financial institutions can facilitate trading. Considering the market is global, traders will most like find another buyer and seller when the local trading venues are already closed. Because of this, the FX market is open around the clock, for 24 hours. However, offices are not open during weekends, which make trading available only during weekdays from Mondays to Fridays.
The 24-hour availability of the FX market is made possible by the changing time zones in different countries. While it’s Monday in New Zealand for example, the rest of the world is still on Sunday. As one country’s market day closes, another region’s financial institution opens. For this reason, traders can buy and sell currencies on any country’s market while developments happen.
- Trading Time in Detail
Trading officially starts as the FX market opens on Monday in Sydney, Australia. It’ll end on Friday evening as sessions close in New York.
A single trading day is divided into three major sessions starting from Tokyo (Asian market) at 21:00 GMT (Daylight Savings Time), to London (European market), and closes in the US (American market) at 21:00 GMT, coinciding with the opening of the Asian market. There are many other sessions and markets, but these three are the largest of them. Of the three however, the European market is the biggest with 50% of trading go through it every day.
By the time the Asian market closes at 08:00 GMT, the European market is already facilitating transactions since it opens at 06:00 GMT. Then again, by the time the European market is closed at 16:00 GMT, the US market is already trading because it already opened at 13:30 GMT. This cycle runs every day from Monday to Friday. The overlapping time that each regional market opens enables traders to buy and sell currencies 24 hours a day.
Whenever regional markets overlap, the FX market is swamped with high volumes of trading activities. The Asian and European markets overlap between 6 and 8 GMT, while the European and US markets overlap between 13:30 and 16:00 GMT. Each overlapping session is considered the most exciting time of the trading day as volatility are at its maximum, creating endless opportunities for trading.
The Main Trading Venue
Traders can buy and sell currencies from online brokers anytime wherever they are. Online trading can be done on desktop computers, laptops, tablets, and even on mobile phones. Online trading has never been this convenient before. Today, traders can monitor their accounts remotely, withdraw profits, and open or close deals. The combination of the 24-hour schedule of the FX market and the accessibility of online platforms make trading easy.
Understanding How to Make Profit from Online Trading
As mentioned earlier, currencies are always paired in trading. This enables traders to still make a profit whatever the situation or trend in the market is.
The key to making a profit from online trading is buying a currency when it is low and selling it as it gets high. However, traders should be able to determine the strength (rising currency rate) and weakness (diminishing currency rate) of a currency in a pair.
- Exchange Rates in Detail
Like in any other marketplace, supply and demand is the main factor that affects prices in currency exchange. However, geographical, political, and economic issues also cause rates to fluctuate. In FX trading, these factors can be used to predict movements in currency rate through fundamental analysis.
The Risk of Forex Trading
Because Forex trading is risky, traders are encouraged to start with an investment that is affordable, commensurate to the income that one is earning. Educating one’s self about the ins and outs of trading should be meticulously done to avoid huge risks. Various controls can be learned to minimize risks. Stop loss for example, allows traders to put a limit, called a margin, on the amount that can be risked. This way, profit is safe and unaffected.
Getting Involved in Forex Trading in Zimbabwe
FX trading is easy to start with. Interested individuals can select from a long list of online Forex brokers, register with a chosen broker, choose the type of account or investment, and deposit the required amount. Many brokers provide account managers to help traders choose the type of investment they want. They can also provide support, assistance, and training.
Because the FX market is worldwide, brokers accept payments using different currencies, usually the major ones – Japanese Yen, British Pound, Euro, and of course, US dollars. Paying is convenient as well. Traders can make payments through ewallets, bank transfers, debit cards, or credit cards.
However, it’s common for traders to feel unsure about which account to choose. The good thing is that brokers offer demo accounts that are usually free, for a certain period. Demo accounts allow first-time traders, or those who want to try out different brokers, to experience online trading, but without risking actual money.
On the other hand, traders can experience real market conditions using a live account, but without using big amounts of money through a mini account. Brokers offer this type of account to enable customers to create small trades, often requiring low initial deposits.
Trading involves many terminologies that are important in understanding various transactions. Here are some of them.
Quoted currency pairs are represented with four decimal places, usually written as 0.0001 pip. Pip, or percentage in point, is the smallest amount of change in the rates of currencies. However, certain pairs only have two decimal places in their pips. The USD/JPY pair for example, has a 0.01 pip.
- Take Profit and Stop Loss Rates
A stop loss rate puts a cap on the amount of investment that is open to risk. Once the market reaches the rate that a trader has set, deals are closed automatically. Similarly, a take profit rate sets a limit on the amount of profit that a trader wants to take. Deals are also closed automatically upon reaching preset profit rates. With a take profit rate all set, traders don’t have to monitor their position in the market all the time.
Leverage allows traders to invest more money even if there is not enough in their accounts. This is possible because a larger trade can be opened with a free balance. It works by allowing traders to invest small amounts, and then conduct trading by choosing deals that are larger than the invested amount. However, though larger trades can result in larger profits, it can also lead to losses.
- Short and Long
The FX market allows traders to transact both ways, meaning, it is bi-directional. An individual can buy or sell currencies based on a strategy that a trader uses. Such strategies can either be called going short or going long.
Going long indicates that a trader is buying and looking for rates that are projected to rise. Going short on the other hand, means that a trader is selling because the rate of the currency being sold is expected to fall. Despite the contradictions between the two, these strategies are commonly used at almost the same manner and instances.
Prices for trading currencies are presented on a currency table. There are always two sets in it. On the right side is the ask price. It is the one that you can buy, that’s why sometimes it is also called the buy price. On the left side of the table is the bid price and you can also call it the sell price because it is the one you can sell.
The ask price is always designated to the base currency, the one of the left side of a currency pair. The bid price on the other hand, is assigned to the counter currency. The difference between the price you’ll pay to buy a currency and the amount you’ll get upon selling it is called the spread.
The spread is actually the trading cost. It’s important to understand this because many brokers offer low spreads. However, traders should be careful of this because brokers may ask for higher commissions to compensate.
Types of Orders
Orders in Forex trading are similar to ordering a meal in a restaurant. It indicates whether a trader is ordering currencies to buy or sell. There are different types of orders in FX trading, but these three are the most common ones. Rates for stop loss and take profit can be applied with these orders to help manage risk.
- Marker Order
A market order is used to buy or sell currencies using the best available current market price or spot. When this order is placed, it is executed immediately, giving it an open position. This means that fluctuations can significantly affect it. In case rates go down, a trader is subject to an unrealized loss or the value of the order’s position deteriorates. Of course, the opposite would happen if the rates go up.
- Forward Order
A forward order has the same features as a market order. However, its value date is greater than its spot value date. This means that the exchange rate of a particular currency has been locked for future purchase. It becomes higher because interest rates apply. The current rate is called the spot rate, while the future rate is called a forward rate.
- Pending Order
A pending order cannot be executed by a trading platform unless the pre-defined conditions are met. It will remain in pending status until time expires or rates are enough. Once preset conditions are reached, the trading is automatically triggered.
What to Do Next
With the information detailed here, anyone can start an online trading account. The Forex market has a great potential to help anyone gain extra profit, or make it into a full-time source on income. However, those who are interested should take time to study more about the world of Forex and educate themselves about trading.