Business December 13, 2018 Last updated December 10th, 2018 172 Reads share

How to Effectively Trade in Foreign Currencies

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The increasingly global nature of the trading market which has been ushered in by globalization has meant that wealthy individuals and financial trading institutions wish to trade in foreign currencies on the exchange market.  This is known as foreign exchange trading, which is more commonly referred to as Forex trading.  The Forex market is the most liquid market in the world with more than $5 trillion being traded daily on this market.  Currencies are traded on an online trading platform in this type of a market.

 

How the FOREX trading market works

The beauty of the Forex trading market is that it works similar to the stock market in that it allows traders to trade currencies based on their opinions of the currencies’ true or estimated future projected value.  For example, if a trader feels as though the Yen will depreciate in relation to the US Dollar, then he or she can sell his or her Yen notes and use the proceeds to purchase more US Dollar notes in the anticipation that the US Dollar will continue to appreciate, thereby allowing the user to make a handsome profit on his or her trade!  The Forex market is vast making it easy for traders to find many more buyers and sellers for a particular currency than he or she would on the conventional stock trading exchanges,

 

How to trade currencies on the FOREX trading market

When a trader engages in Forex trading he or she trades in two different currencies simultaneously because he or she is betting on the rise or fall in the value of one currency in relation to the other one!  In Forex trading, the first currency being traded, the US Dollar is the base currency – the currency whose value will be used as a comparison point for the rise and fall in the intrinsic value of the other currency being traded, which is the INR in this example.  The INR is the counter currency because it works against the base currency.  Whenever prices are quoted on the Forex trading exchange, they are quoted in reference to the base currency, the US Dollar in this case.   Therefore prices quoted in regards to current currency values are always quoted in relation to the value of the INR (or another currency) against the US Dollar.

 

When a person trades foreign currencies on the Forex trading exchange, he or she does so on an online trading platform.  The value of the currencies in question depends on the demand versus the supply of these currencies on the exchange on that particular day.  For example, if a person trades Euros in exchange for INR, and the Euro is worth more than the INR at the beginning of the day, the Euro could actually decrease in value in relation to the INR if there are many more Euros available than there is demand for them by the end of the trading day.

 

Forex trading exchanges are most beneficial to those who do a great deal of traveling to many parts of the world every year and want to have a very transparent and liquid way of exchanging their currencies often while preserving as much of their intrinsic value as possible.  For example, a person traveling from India to the United Kingdom would exchange his or her Indian rupees for the British pound, and if the Indian rupee was worth more than the British pound, he or she would receive many more British pounds for the Indian rupee notes that he or she possessed!  Since the exchange rates change daily, the number of British pounds the person would receive for his or her Indian rupee notes would vary according to the particular day.

 

Multinationals with many offices overseas particularly value online trading platforms on Forex trading exchanges because it allows them to quickly and easily convert one currency to another while still retaining its absolute liquidity.  For example, Deloitte, an American based accountancy and consulting firm with branch offices in India could use the online trading platforms on Forex trading exchanges to easily exchange its base currency, the American dollar, for Indian rupee notes which it would pay its Indian employees in.  Although Deloitte has established paydays for its Indian employees, the company does retain its American dollars and tries to exchange them when the exchange rate is favorable, ensuring that it receives the most Indian rupee notes possible for its American dollars.

 

Because currencies are like commodities on the online trading platform, a trader can trade various currencies based on what he or she thinks its value or its future value is likely to be.  For example, if a person thinks that the American dollar will appreciate significantly in relation to the Indian rupee, then he or she can buy up many Indian rupees to exchange for even more American dollars at a future date, thereby enhancing his or her return on investment (ROI), and ensuring that he or she makes a handsome profit in the process.  In this example, the American dollar did indeed appreciate greatly in relation to the Indian rupee, and the person bought 1 lakh Indian rupees, thereby ensuring that he or she made a handsome profit when exchanging them for American dollars.

 

If the value of one currency decreases in relation to another, suppose, for example, the American dollar decreases in relation to the Euro, then the trader will lose a great deal of money in terms of currency value, and will want to sell his or her Euros in favor of the American dollar as soon as the value of the Euro begins to drop!

 

Many online trading platforms exist, and  Saxo Capital Markets is one of them.  Its numerous online trading platforms provide traders with the most transparency and flexibility possible, allowing them to make numerous fair trades on any given trading day.  This company makes trading much easier for private and institutional clients to ensure that they receive the greatest value for the currencies that they trade!

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Dipa Singha

Dipa Singha

I am Dipa Singha, a professional writer; my passion for learning and sharing also made me a Writer and an Entrepreneur. I believe every one of us should share our experiences with the each other as it helps us evolve and learn more. I write on topics which are related to technology, finance, marketing and management.

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