Forex, otherwise known as foreign exchange, FX or cash exchanging, is a decentralized worldwide market where every one of the world’s monetary standards gets bought and sold. The forex market is the biggest, most liquid market on the planet with a normal day by day exchanging volume surpassing USD$5 trillion. If you’re looking to get started in trading in forex, this article is here to get you started. In this article, the GCG Asia Forex Trading team explains how you may track down opportunities in currency exchanging options in the changing market.
First, what is forex? How is it determined? The forex exchange rate between the two currencies is based on supply and demand which determine the amount of currency you will get. The foreign exchange market is a worldwide commercial hub that is open 24 hours every day Monday through Friday. All forex exchanging happens Over the Counter (OTC), which means there’s no actual physical place (as there is for stocks or equities), as OTC transactions occur directly between two parties.
GCG Asia Malaysia and Singapore forex trading teams explain that exchange rates fluctuate continuously depending on environmental factors varying from geopolitics to environmental disasters. These fluctuations are closely monitored because of their potentially huge effect on businesses. For example, if someone values 1 Malaysian Ringgit at 0.32 Singapore Dollars on Thursday, but come Friday, the Malaysian Ringgit is valued at 0.33 Singapore Dollars. This does not seem like much of a difference for the average individual but imagine being a Singaporean multi-million dollar company having to pay hundreds of employees in Malaysia. This minor change can pile up and cost the company a big amount of revenue if the currency is not traded at the right time.
While a great deal of foreign exchange is used for functional purposes, most trades are done with the aim of gaining profit. However, forex trading can be unpredictable. As GCG Asia CEO Eddy Teow explains, “It is this instability that can make forex so appealing to brokers: achieving a possibility of high gains, while additionally expanding the risk. High risk, high reward, as the saying goes.”
A larger part of the exchange in the forex market happens between institutional traders, for example, individuals who work for banks, corporations, and hedge funds. These parties don’t mean to take actual ownership of the monetary forms themselves; they may be predicting the future exchange rate variances with educated guesses to make a gain. For instance, a broker may purchase Malaysian Ringgit and sell Singaporean Dollars if the broker thought that the Ringgit will gain value in the market and Singaporean Dollar will continue to dip.
Advantages and Disadvantages of Forex Trading as an Investment
Although forex trading seems exciting and profitable, GCG Asia experts caution that it can turn around on you very quickly, turning profit into accumulated losses. As a GCG Asia report once stated: “when you purchase and sell currencies through foreign exchanges, you’re wagering on how various nations’ currencies rates will change against each other. All else equivalent, on the off chance that you buy a currency that winds up strengthening in rates against the currency it’s concerned with, you benefit. On the off chance that its rate diminishes you incur shortfalls.”
All trading instruments and markets have their advantages and disadvantages which you should know before taking the leap into making a trade or investment. Here are some of forex’s trading pros and cons:
Advantages:
- Cost-effective: this means that in the spot market, typically there are no clearing charges, no exchange expenses, no administration burdens, no business expenses, and no commissions. “Brokers make their yields from the bids which are extremely straightforward to clients,” GCG Singapore analyst Ben Foo explains.
- Decentralized: the foreign exchange market is estimated to be one of the largest markets in the world worth more than USD$5 trillion in trades. There are numerous individuals trading each day which means extreme losses are somewhat hard to come by.
- User-Friendly: the forex market is easily accessible for anyone with limited capital and low operation costs, while also eliminating middlemen which allows direct access to the market for everyone.
Disadvantages:
- Risk of scams: One of the disadvantages of forex is the high possibility of getting scammed by brokers that are not reliable and untrustworthy. The prevalence of unreliable scam brokerages is one of the reasons GCG Asia is developing the Scam Finder software to find and report scams in forex trading.
- Low transparency: low transparency in access to real-time data is a disadvantage for newcomers. This makes it harder for non-experienced individuals to enter the market, and easier for brokers to vary their prices.
- Country Risk: naturally, an investor should evaluate the market before entering it. Meaning that the investor must look into the environmental stability of whichever country’s forex they want to invest in. For example, a country may be facing political turmoil which can lead to a steep devaluation of the currency. That is why GCG Asia’s experts recommend newcomers to always invest in the world’s major currencies such as the USD, the Japanese yen or Pound sterling, rather than riskier third world currencies which might be more volatile, thus lowering your chances of getting a decent return on investment.
Types of Forex Trades
Due to the size of the market, the market is split up into three types of forex markets where a specific type of currency trading takes place. These are:
- The Spot Market: GCG Singapore’s Ben Foo explains that “The spot market makes up about 40% of the all-out exchange, and this is the place where you will discover most retail brokers.” The spot market is also the biggest forex market and is the place where every day traders use to exchange currencies. The word ‘spot’ comes from the ‘on the spot’ where the currency is purchased or sold at that moment. During this process, the cost is determined by the interest or supply of the currency. In the spot market, genuine currencies are exchanged, and when an agreement is agreed upon, it is known as a “spot bargain”.
- The Forward Market: In the forward market, currencies are not sold. Rather, contracts for commodities and currencies are purchased and sold over-the-counter between two parties. The terms and agreements are controlled by those parties.
- The Futures Market: The forex futures market is the place where future agreements are purchased or sold, to exchange a pre-defined measure of currency at an agreed-upon cost, at a set date later on. In the futures market, contracts are done depending on the agreement’s expiration date.
How to Start Trading
GCG Asia Forex Trading experts advise investors to always be aware when it comes to forex trading to avoid any scam or price manipulation in the forex market. GCG Asia also recommends always use regulated or government-certified forex trading brokerages rather than black markets that promise unrealistically low fees or other sweeteners to lure investors. GCG Asia advises their clients to always go a step further and verify that brokers are reputable, qualified and certified to get the best out of your trades.
GCG CEO and founder Eddy Teow explains that forex trading for all its volatility does have one advantage over trading in equities. “Forex trading is focused and limited. There’s simply a limited number of currencies in the world. While newcomers can be overwhelmed by the numerous stocks in the world that are available to buy and sell, this doesn’t happen in forex.”
On the other hand, GCG Asia experts would recommend forex trading for several reasons. First, if you are looking for high liquidity then forex is the way to go. The forex market is open 24 hours daily from Monday to Friday, which makes it a lot easier to trade with foreign currencies in real-time. This means there’s ample opportunities to make profits at any time of day, especially using automated trading orders, you can set it and forget it! Trading in forex is also a great way to diversify your portfolio.
However, the forex market is also very volatile. This means there is considerable risk for newcomers to forex trading especially if you don’t have a proper strategy. GCG Asia experts advise those who are interested in getting into forex to assess your risk tolerance and time horizon (whether it’s hours or days or weeks), just like any investor would do before making any investment. “Evaluating your risk appetite, thinking of your strategy etc, all these elements are an important part of any trade and investment, whether your focus is on short- or long-term gains,” says GCG Asia CEO Eddy Teow.
Finally, there exists many tools and software that may help you in investing in forex. GCG Asia highly recommends that you train and learn more on using any of these tools before diving into the world of currency trading. Not only that, seeing as how geopolitics and environmental events directly affect the forex market, GCG Malaysia analysts suggest following the latest news from multiple news sources every day in order to keep up to date. You could also follow brokers and investors that have experience in the field to gain more knowledge from their experiences in forex.