How is Forex Trading Conducted?
Similar to other transactions, forex trading involves sellers, buyers, and intermediaries. While buyers and sellers in this market could be banks, investment management firms, commercial companies, hedge funds and retail investors, the intermediaries are the brokers. Forex brokers act as market makers and place bid and ask prices for a currency pair on behalf of the buyer or the seller.
Buyers make money by buying a currency at a lower price and selling it later at a higher price. All transactions by individual traders in case of the forex market occur through brokers. However, the majority of the forex trade is conducted between banks.
Benefits of Forex Trading
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It is done in an extremely liquid market. Hence, one is unlikely to get stuck in a trade. He/she can open and close any position according to his/her desired level.
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Traders can make profits in both rising and falling markets. One can take a short position (selling the currency pair and purchasing it back at a lower price) or long position (purchasing the currency pair and selling it later at a higher price).
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Gives traders an option to trade in small lots. This allows a beginner or a novice trader to begin with small amount of capital and limits the risks.
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Traders don't need to pay commissions to brokers. The transaction cost is built into the currency price and is known as spread, which is actually the difference between the buying and selling price at a given time.
Drawbacks of Forex Trading
Forex trading could lead to huge losses incase the trader is a novice. The lack of prompt action can also lead to significant losses.
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