To make money off the difference that is between the currency values is referred to as forex trading or foreign exchange and it is not a trade for the faint hearted. One thing about them is that, it doesn’t have any centralized markets the way the stock markets have to facilitate your trading. Another thing is that, the risks tend to go past the individual company or a performance of a whole industry. But if you do tend to understand the risk and decide to trade conservatively using the South African forex brokers, then it is possible to trade effectively on the currencies.
The following are the basics to ensure that you get started on trading on forex in a responsible manner.
What is forex trading?
In simple terms, forex normally refers to a foreign exchange whereby you can be able to trade a currency against the other in pairs. An example being that, you can come across pairs like USD/ZAR where you swap the US dollar against the South African rand.
In the trade, you can decide to be long for one currency and be short on the other currency. It means that, you will be able to make money when one price is able to rise, which is a long and at the same time, you can still be able to make money when one price ends up falling, which is a short.
An example being that, if you decide to long the USD, you will need to ensure that the USD exchange rate is able to increase for you to make profit on that particular trade. If you are short on the ZAR, then you are going to make money if the ZAR decreases in value on the USD. Such kind of exchange is known as exchange fluctuations PIPs – percentage in point movement.
The sell high and buy low dynamic tends to be embraced in the stock trading at is it’s not quite a dry cut in the forex trading. The risks will help in illustrating why. Just with an investing and trading activity, it is better to go into the venture when you are free of debt, with an emergency fund as well as a long term plan for investment in place. You don’t have to trade with money which belongs to the emergency fund or the account for retirement.
The risks of exchange rates
When it comes to forex trading, you will have to sue the currency of one country in purchasing for the currency of the other country. Changes that happen in the value which is relative of the two currencies can end up affecting the losses or even the profits. You will do this when you take a vacation on an international travel. If you happen for example to travel from the USA heading to Canada, $1 USD might make you to get $1.31 CAD which was true as at October 2002, 27. The ITA – international trade administration tend to describe such exchange rate to be risk at the level of the company when having trade deals.
The relative values which the two currencies happen to have might change between the times the deal ends and the time when the payment is given out. If you are not well protected, depreciation or a devaluation of the foreign currency might cause you to lose the money. An example being where the buyer agrees to pay $500,000 euros for a certain shipment which the Euro values at $0.85, you are going to receive $425,000. If at any point the Euro decreases in the value to $0.84 the payment within the new rate will be $420000 where you lose $5000.
For the foreign currency increasing in value, you will get a windfall in terms of extra profits. When you sell and buy the currencies through the foreign exchanges, you will be betting on the different currencies of various countries changing in value against each other. All else remains equal, if you end up purchasing a currency which ends up to increase in value against the currency that it is paired with you will make a profit. If it goes down in value, you will end up to chalk in losses.
The exchange rates are normally linked very closely to the interest rate of a country. If the interest rates are rising, they attract investment in that particular country. When the interest rates fall, they lead to disinvestment happening and the currency value goes down. The forex traders have to pay close attention to the relationship before they head into a trade, while managing one as you prepare for the exit of the other.
The country risk
The country risks can be divided into two main categories:
The first one is quite straightforward. The country’s instability might end up impacting on the currency. Whenever there is an adverse even happening, or the traders tend to fear that there is one which could be happening, the investors will tend to remove their money from the currency of the country into their own, which ends up devaluing the currency. You don’t want to find yourself in the wrong part of the trade when a devaluation happens. It might happen so fast like when there is political turmoil, leading to market which are illiquid. You are likely to risk yourself holding the bag and getting stuck in the trade.
There is another country risk when the nation decides to intentionally devalue their currency. There are some forex traders who call this type of risk as devaluation risk. It is not quite bad as it is a form of a policy for monetary where the country ends up to purposefully decrease the value of its own currency so that it can be able to compete favorably from a certain standpoint of trade. A currency which is cheaper tends to make the nation to export cheaper when it comes to the export market.