The Basics of Trading in the Forex Market
What is Forex and the Forex market?
Whether you have realized it or not, you have probably participated in the foreign exchange market at some point in your life. Essentially, the Forex market deals with the trading of currencies between countries.
Have you ever gone to the bank or a foreign exchange service and traded currency of one country for that of another? If you have, then you have actually engaged in the Forex market before.
The Forex market is a decentralized global marketplace for trading currencies and is the largest market in the world. Essentially, how it works is that relative rates are set between the currencies of different countries. From there, investors are able to trade among themselves to receive the desired currency.
So what kind of assets can you use to make money in the Forex market?
First and foremost, you can hold the literal currency of a particular country. Often, this happens when you enter with cash on hand and actually exchange your money for raw currency of another country. This typically happens when you exchange money at the bank and they give you another country’s currency in exchange for your domestic currency. In other cases, you may be looking for more of an investment strategy, rather than having the right currency for your travels. In these other instances, you can wait and see if a particular currency will appreciate relative to some other currency before you decide to cash it in. However, there are some other assets beyond physical currency that you can trade in the Forex market––we will discuss these next.
What are other Forex assets?
As we mentioned, there are also all sorts of Forex derivatives that you can take advantage of as a trader. However, beware of the complexities when considering the many factors affecting the nature of the Forex market. Don’t worry, these factors are discussed in
another article of ours so you can fully understand the environment you are investing in.
Here are the various Forex derivatives you can trade:
Currency future and forward. These represent agreements to exchange the currency of one country for another at some particular date in the future. The day that the agreement is made sets the price at which these are traded.
Non-deliverable forward. This is very similar to the previous derivative type, except that instead of actually exchanging currencies, the difference is settled with cash. These are often found in currency and commodities markets.
Foreign exchange swap. Essentially what happens with these is that a purchase and sale happen simultaneously between two parties. One currency is sold to another party at the current rate, but is eventually sold back at the future rate.
Currency swap. Generally, these represent loans of two different currencies with each party holding one currency. Once the swap occurs, each party switches currencies but holds on to the same interest and principal payment obligations as they were originally subject too.
Foreign exchange options. These work very similarly to regular options, other than the fact that it deals with currencies. Essentially, this represents the option to exchange currencies at a future date, but at a rate set on the agreement date. As you know about options, these are not obligatory to exercise as are forwards and futures.
So those are some of the assets available for trading in the Forex market. In terms of particular trading strategies, we will cover these in further detail in a future article.
Our Rich Dad Education speakers cover the basics of the Foreign Exchange Market (Forex), where you have the opportunity to trade 24-hours a day, 5 days a week. Explore this dynamic, fast-paced market and discover if you want to make it a part of your investing future. Be sure to learn about all the ways Rich Dad Education can help you reach your goals.
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