- First Part
- What is Foreign Exchange…?
- Ways to do Forex Trading
- Advantages & Disadvantages of Forex Trading
- Second Part
What is Foreign Exchange…?
Anyone who has ever traveled from one country to another is aware that at some point during their trip, they will need to exchange their home currency for the local currency of their destination. For example, if someone are an Australian visiting Canada, it will need to convert home Currency to host currency (AUD to CAD). This holds true for every single nation on earth. This implies that everyone who has ever travelled has engaged in forex trading. Even though it is the simplest deal, there are a lot of other methods we can trade currencies. Buyers typically have to exchange their currency into that of the exporting (selling) country when importing and exporting products. By employing a forex broker, one can also engage directly in forex trading. The big banks are some of the key participants in the forex market.
“Single currency is never traded; it’s called a currency exchange. Only currency pairs are trade in Forex Market.”
Ways to do Forex Trading
Spot Market Forex Trading.
Spot market is the terms used when an operation is regular in nature. It solely deals with current or spot foreign exchange transactions.
Forward Market (OTC) Forex Trading.
Forward Market refers to a market where currency purchase and sold for future delivery. It deals with activities (the selling and buying of currency that are agreed upon today but may be carried out later). The forward rate is the exchange rate that applies to a forward contract for the purchase or selling of foreign currency.
Future Market (OTE) Forex Trading.
The futures market transacts with centralized contracts with settlement dates based on PTFI. As an example, a futures contract based on National Stock Exchange rather than an agreements between the buyer and the seller. The contract specifications are absolutely clear with regard to settlement dates, the quantity of traded units, settlement dates, and also any price adjustments in futures markets, which are heavily controlled.
Advantages & Disadvantages of Forex Trading
Advantages of Forex Trading
Flexible (5 Days & 24hrs Market)
FX gives traders a large amount of flexibility. This is due to the fact that there are no restrictions on the amounts of money that may be spent for trading. In addition, there is hardly any market regulation. This makes for an extremely flexible environment for traders, especially given that the market is open 24/5.
Even those who work normal jobs can participate in fx trading. If they are trading on the share markets or in their own countries, they cannot do the same, though! This is why part-time traders like Forex since it offers a flexible schedule that interferes the least with their full-time jobs.
When trading stocks, futures, or options, you must be prepared to pay large transaction fees, broker commissions. However, FX brokers normally make their money through a big volume of extremely modest spreads.
Wider Range of Trading Opportunities:
FX Market provides traders a wide range of trading choices. Traders get a wide range of currency pairs. They are also given the option of engaging in spot trading or entering into a future arrangement.
Financial markets allow traders to trade using borrowed funds. This borrowing is referred to as leverage, and it allows a trader to control more securities and earn bigger earnings. While other markets provide leverage ranging from 1:2 to 1:4 Most of the FX Traders provide leverage of 1:20. In reality, several forex brokers currently provide leverage of 1:100 or even 1:200. That is, for every $1 invested, you gain control of a portfolio worth $100.
Liquidity in the forex market refers to a currency pair’s capacity to be purchased and sold without substantially altering its exchange rate.
If it is simple to buy or sell a currency pair and there is a lot of trading activity for that pair, the pair is considered to have a high level of liquidity. Daily turnover of Fx market is around 7 trillion US Dollar.
Disadvantages of Fx Trading
Fx trading provides traders with huge leverage. New investors could lose all of their money in a short period of time if they don’t recognize the risks hidden in this investment tool.
Counter party Risks:
Fx market is huge market, making it challenging to understand the rules of every country. Fx trading regulations may exist to safeguard investors and traders, but there is always the possibility that a contract may not be followed.
Currency Pairs Price Determination is difficult Processor:
The inability to predict the value of currency pair rates, which can be affected by a variety of variables including politics, economic change, central banks, etc., is a significant issue in the forex market. That is the primary concern that needs to be taken into account, since a chart’s incorrect interpretation can result in substantial losses.
Fx traders use the term “volatility” to describe how large the ups and downs of a fx pairs are over a given time period. The amount of the ups and downs determines how volatile the market is. These significant changes might cause variability but some traders view them as an opportunity to make large sums of money. They might be shown to be mistaken, though, and that could result in uncontrollable losses.
Forex Market Is Unregulated
The forex market is unregulated, which sets it apart from other markets. It is decentralized and lacks a central clearing house or exchange. It is open to everyone, with no restrictions on entrance. The only thing that separates traders is the quantity of money they are trading. No one organization and individual, including a cartel, government, corporation, or individual, has the power to significantly affect pricing.
However, regulatory organizations are in charge of registered brokerage firms and ensuring that ethical business standards are followed. These authorities protect investors from dishonest brokers, money-laundering schemes, and other anomalies. They are a collection of international governmental organisations, independent supervisory authorities, and professional organisations.
Some Regulated Authorities are :-
- The Financial Market Authority – FMA (Austria)
- The Financial Services Authority – FSA (UK)
- The International Financial Services Commission – IFSC (Australia, Belize,
Is forex trading legal or illegal?
The RBI prohibited currency trading using electronic or online trading portals in a circular that was published in September 2013. However, when done through specific forex trading systems and with INR as the foundation currency, forex trading is considered legal. The Government of India has restricted trading for Indian citizens to just currency pairs that are paired against the INR, to put it simply (Indian Rupee).
If you are a resident of India and are trading through with a specific Indian broker that gives you access to Indian exchanges like the NSE, BSE, MCX, and NCEDX. Additionally, NSE offers a currency derivative trading facility; all trades conducted through this facility are deemed to be totally lawful. Previously, only the currencies USD/INR, EUR/INR, GBP/INR & JPY/INR.
Engaging in unlawful forex trading in India is punishable by imprisonment or a fine under the Foreign Exchange Management Act (FEMA), 1999.
Why forex trading is illegal in India.
- Due to the absence of Security Exchange Board of India regulation, forex trading is illegal in India.
- Indian citizens are prohibited from trading in foreign currencies by RBI.
- It is challenging to control and regulate currency trading in India due to the absence of central exchange.
- The forex market is not appropriate for individual investors because of the significant risk of manipulation.
- The use of forex trading to finance terrorism and money laundering are both prohibited practices in India.
What Penalties or Punishment Are Enforced For Violating The Act?
If anybody violates any provisions, notification, orders, circular, etc., the punishment may be up to three times the amount involved in the violation; if the amount involved in the violation cannot be determined, the penalty may be up to 200,000. If the violation is persistent, an additional fine of up to 5,000 everyday may be levied for each additional day the violation persists.
Any person who fails to fully pay the penalty levied on person under Section 13 within 90 days of the day on which the notice for payment of such penalty is served on him is subject to civil imprisonment under this Section.
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