The Finatical

Week of November 30th, 2021 - Forex Tips

Finatic

Aditya Bagga

, and

Sidh Aneja

Nov 30, 2021

Foreign exchange is the process of changing one currency into another for a variety of reasons, usually for commerce, trading, or tourism. The foreign exchange market, more commonly known as forex, is where currencies are traded. Currencies are important because they enable purchase of goods and services locally and across borders. International currencies need to be exchanged to conduct foreign trade and business. One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over the counter (OTC), which means that all transactions occur via computer networks among traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich—across almost every time zone. This means that when the U.S. trading day ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of day, with price quotes changing constantly.

Stop-Loss Orders

Like any other form of trading, forex trading also involves some risk and that risk can be mitigated through stop-loss orders. A stop-loss order is an order placed with a broker to buy or sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor’s loss on a position in a security and are different from stop-limit orders. When a stock falls below the stop price the order becomes a market order and it executes at the next available price. Stop-loss orders are an essential forex risk management tool since they can help traders cap their risk per trade, preventing significant losses.

Forwards and Futures Market

Another way to offset some of the risk involved in forex trading is by correctly making use of the futures and forwards forex market. A forward contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the OTC markets. A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and at a predetermined price. Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange.

Find a Reputable Broker

During forex trading, it is quite likely that you can end up doing business with a less-reputable broker. So, it is always better for forex traders to only open an account with a firm that is a member of the National Futures Association (NFA) and is registered with the Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Each country outside the United States has its own regulatory body with which legitimate forex brokers should be registered. The overall integrity of the broker must be kept in mind before making any decision and therefore traders should research each broker’s account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies.

Financial Guidance

“Your economic security does not lie in your job; it lies in your own power to produce—to think, to learn, to create, to adapt. That’s true financial independence. It’s not having wealth; it’s having the power to produce wealth.” –Stephen Covey