Intro to Investing: Foreign Exchange (Forex) Trading

Forex trading is the fastest cross-border, highly liquid market in the world. It comprises dealers who are engaged in foreign exchange trading.

A forex dealer provides its clients with a quote to buy and sell currencies or other financial instruments. There is no close cash pricing. The forex dealer's quotes are based on the prices quoted by various liquidity providers around the world.

The forex dealer executes transactions made by clients at their given quotes. They simultaneously contract liquidity providers to buy or sell the relevant amount of currency to complete the client's transaction.

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The international money market trades 24 hours, five days per week (Monday through Friday) and three days per week (Saturday), excluding traditional weekends.

Explanation: Almost every one of us would have engaged in Forex at one point or another. When we travel overseas, we'll need to exchange our SGD for the local currency there.

Or, when we make an online purchase, we're selling SGD to buy the product or item in their local currency.

However, in those situations, we're buying a currency to make a purchase.

When we talk about Forex Trading, we're usually referring to the speculative nature of this market. And that's because the buying and selling of currencies take place multiple times per second.

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Traders are therefore speculating whether a currency pair would increase or decrease within a period. The periods can be as short as 1-min or extended for as long as a few months. The goal is to buy a currency pair when prices are low and sell when it's high. Or the reverse is to sell when it's high and buy when it's low. (If there's enough interest in this topic, I might dive deeper in a separate article)

Things to Note: While many different currencies worldwide, most traders focus on a few currency pairs. This helps the trader get a better feel of those markets and narrows the amount of information and data they need to monitor.

At the same time, the "spread" for some pairs is tighter, which gives the trader more opportunities to make money. Just think about the "commission" the money changer makes when you exchange currencies to understand spreads. In this case, the platform earns those "commissions."

Risks Considerations: Forex is a high-risk instrument, especially for trades done on margin. Forex is susceptible to market risk (systematic risk), which means almost any news or event can affect its price.

And unlike unsystematic risks, you cannot rely on diversification to reduce this risk.

That said, experienced traders want this type of risk, making the market volatile and allowing them to take advantage of the price difference.

At the same time, Forex still has underlying value as the currencies traded have an actual impact on the citizens of that country.

This means most countries wouldn't allow their currency to crash completely.

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