Forex trading means exchanging the national currencies of different countries. The system of exchanging money can be traced to the old barter system, when governments began trading commodities for precious metals, resulting in the issuing of coins in valuable metals including copper, known as coinage metals. Money is a medium of exchange that is used to complete all of our domestic and international trades and services. Currency, including bank notes, is a modern type of money issued by a government in the form of paper or coins for a specific country, such as the US dollar or the Euro.
Forex History at glance:
Foreign exchange trading began in Amsterdam and spread throughout the world. The advancement of the Forex market can be summarized as under:
- Pre-Historic currency markets prior to 1875
- Gold & Silver standard (coinage metals) 1875-1939
- Pack Systems such as the Bretton Woods system (1971-1973), the Smithsonian Agreement (1971-73), and the Plaza Accord from 1985 to 1987.
- Present Modern Forex trading: a global trading platform for exchanging currencies of different countries.
Foreign Exchange:
The foreign exchange market often known as the Forex or FX market is a global trading platform for exchanging one country’s currency for another. The Forex Market functions electronically through computer networks all over the world, and it serves liquidity and pace to everyone from the casual trader to major organizations. Buying & selling a currency of a country with another currency by an individual or institution is the basis of this platform. The exchange of money or currency with appreciation or depreciation is known as forex trading.
Players of Forex Market:
The foreign exchange market is the world's largest financial market, with the most capital invested and traded on a daily basis. Commercial banks, central banks, governments, brokers, multinational corporations, institutions, retail traders, regulators, hedge fund managers, and exchange-traded funds are among the major participants in the Forex market.
Functions of Forex market:
The forex market, also known as the currency market, is a global decentralized platform for trading currencies through investment management organizations, banks, central banks, hedge funds, corporations/commercial companies and investors, and retail forex brokers. Major functions of the forex market can be described as follows:
- The market's primary roles are to simplify currency conversion, provide instruments to control foreign exchange risk (such as future exchange), and allow investors to profit from market speculation. It is the Forex market that determines the exchange rates of all currencies issued by different countries.
- The foreign exchange market is an over-the-counter (OTC) by nature a decentralized platform that establishes global currency exchange rates. OTC marketplaces, unlike exchanges, have never been a "location." Although well-organized, trading networks are based on one or more dealers. Market makers quote rates at which they will sell (ask or offer) or buy (bid) to other dealers and their customers or investors.
- Currency pairings are created in forex trading to compare the value of one currency to the value of another, which is known as the base currency (or the first one) against quote currency (the second). It represents how much of the quote currency is required to purchase one unit of the base currency, such as when the Euro is paired with US$ EUR/USD, the British Pound is paired with US$ GBP/USD, and the US dollar is paired with Japanese yen USD/JPY. It encompasses all aspects of purchasing, selling, and exchanging currencies at current or predetermined values using various tactics such as:
- The spot market,
- The futures market,
- The forward market, and
- The swap market, etc.
Forex Earning by individuals with learning:
(i) The FX market is the world's largest financial market, with the most capital invested and transacted daily. Forex trading has evolved as a popular source of income, particularly for persons with a financial background, due to its high liquidity, 24-hour schedule, and ease of access. Through the foreign exchange, anyone can trade almost any currency in the world. An investor can profit from forex by either increasing the value of the quoted currency or decreasing the value of the base currency.
(ii) After understanding the fundamentals of the forex market and locating the best forex broker, one may begin practicing forex trading by using demo accounts of well-known forex trading platforms. Then it may be determined whether he or she is competent to begin trading with such an investment that can be afforded even if losses occur. The next step is simple that is opening an account and starting trading with a click of a few buttons on a device such as a computer/a laptop or a cellular phone. It is important to remember that "forex trading" is primarily based on speculation of currency prices in terms of economic, political, and geopolitical factors, trade (import and export), and the financial situation of the pairing currencies. It is most difficult, but a competent trader with due diligence can profit from stock trading.
(iii) In return for executing buy and sell orders, the forex broker will charge a commission/fee per trade or a spread (spread is a difference between the bid price and ask price for the trade).
Fraud and scams:
US Commodity Futures Trading Commission (CFTC) has published concerns about Forex fraud and scams for the awareness of the general public, particularly newbies to forex trading, as reproduced below:
(1) The currency market is not only unstable but to some extent carries scams causing loss of investment funds. It is not a good place to invest money that you cannot afford to lose, such as retirement assets, because you might lose most or all of it very rapidly. The CFTC has seen a significant increase in forex trading scams in recent years and wants to advise you on how to spot possible fraud.
(2) Keep your eyes out for these red flags to aid you in recognizing foreign currency trade scams:
- Promises that with forex, there is no “bear” market
- Firms that claim you can or should trade in the interbank market
- Requests to send or transfer cash quickly via the Internet, by mail, or otherwise
- Difficulty getting background information about the person and/or company
According to a press release issued by the State Bank of Pakistan, published in the print media, Forex trading, by any person residing in Pakistan is illegal and constitutes a violation of local laws.
Legal aspects of forex trading:
Despite all of the benefits of Forex, several governments prohibit their nationals from involvement in it. It is legal in many nations but not in all. Some governments have imposed trade volume bans or limitations, putting limits on brokerage houses to prevent catastrophic losses and money laundering with fear from foreign market participants, bringing defeat to their economies as well. With respect to the legality of forex trading, it is apparent that it is not unlawful throughout the whole world, validity of forex trading may be classed into the following three kinds:
(1) Nearly 20 nations have prohibited forex trading in their jurisdiction, including (i) France (ii) Belgium (iii) North Korea (iv) Israel (v) Pakistan (vi) Afghanistan.
(2) Countries, where currency trading is permitted with restrictions, include Russia, China, South Africa, Egypt, Nigeria, and Ukraine.
- United States and the United Kingdom
- Australia & Canada
- Japan and Germany etc.
Extent and scope of Forex:
Currency markets nowadays are continuously in change, owing to a plethora of interconnected economic, political, and social factors. Foreign currency markets play a vital role in the global economy. Foreign exchange markets enhance international trade by allowing businesses to exchange currencies for the purpose of exporting and importing goods and services. The currency rate has the most immediate impact on the real economy through variations in demand for exports and imports. It also offers currencies for foreign investment and the purchase of financial products. Some governments also keep foreign currency reserves to defend themselves against currency exchange rate changes. As such, the forex market is an electronic network of banks, institutions, brokers, and traders, the majority of whom trade through brokers or banks. Thus, the scope and extent of forex trading, with its vast potential cannot be overlooked. If certain concerns change, the 20 countries that presently consider forex trading illegal could possibly lift their bans in the future.
Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Contents of this article do not constitute investment advice and should not be taken as such.