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In this guide, I will be talking all about the exchange rates and how they work in the real world. I will be talking about a hypothetical person in this instance. These events did not take place and are not real, but they hold true information about how it works in the real world and how trading is done.
Joe is travelling to London from his house in New York City, and he wants to make sure that he has at least $200 worth of GBP when he arrives in London. He randomly goes to the local currency exchange shop, and he sees what is the current exchange rate is. He says that if he exchanges $200, he will get £152 in return. This means that the British pound has a higher value. In this case, the equation is very simple. Dollars divided by the exchange rate is equal to pounds.
He has now come back from his trip, and now he wants to exchange his pounds for dollars.
In scenario A, he did not use any of his £152 worth of money, and now he says that the exchange rate has dropped. He exchanges the £152, and because the rate has fallen down, he receives only $191 in exchange. It means that he has lost nine dollars. The reason that he gets a little less money even though having the same value of pounds is that the value of pounds went down a little, while he was away, when compared to the US dollar.
In scenario B, he did not use any of his £152 worth of money, and he says that he wants to exchange it for dollars. He receives $220 in exchange. In this scenario, he has made $20 in profits. This is because, the value of pounds went up, while he was away. This is how, a lot of traders end of making money. They trade money, when they see that the value has risen. It’s certainly is an amazing way to make money.
In a lot of cases, people end up making hundreds of dollars in a couple of minutes.
Keep in mind that not all of the currencies work the same way. For example, the yen is calculated in a much different manner.
Let us assume that someone is travelling to Japan and wants to convert $100 into yen and the exchange rate is 110. The traveller would actually get ¥11,000. If someone wants to convert Yen back into dollars, they would need to divide the amount of the currency by the exchange rate.
¥11,000 divided by 110, which equals $100.
After some time in the forex market, you will get to know that it is not all that complicated.
Foreign exchange, forex happens to be the trading of one currency to another. For example, if you are British and if you’re travelling to the United States of America, you will have to exchange GBP to USD. It is trading one currency to another. You can swap USD for any currency. The same way, any currency can be swapped for any other currency that is valid, in the world. Phonics instance actions can actually take place on the foreign exchange markets, which are also called as forex markets. The forex market happens to be one of the largest, most liquid market in the world. It has dealings of trillions of dollars every single day. Yes, you read that right. This market deals with trillions of dollars every single day. Keep in mind that it is not in a centralised location; it is actually a collection of an electronic network of banks, institutions, brokers and even individual traders. It means that it does not have a tangible location. But, it exists, and it is the largest financial market in the world.
The internet has certainly made it possible for transactions like the above. The internet is something that connects us to a lot of people all around the world. Without the internet, the forex market would not be where it is. Foreign exchange trading actually utilises currency pairs, which are priced in terms of one versus another. For example, if you are comparing INR to USD, you would be comparing one USD to INR. Today’s exchange rate is one USD is equal to 74 INR. I am sure at this point; I am sure you get the picture of what exactly I’m talking about.
Let me now tell you about how it works. The market actually determines the value, and it also knows the exchange rates of all the major currencies. Foreign-exchange can also be very simple; it can be the changing of one currency to another, even at a local bank. It can also involve the trading of some currencies on the foreign exchange market. A trader who is betting in a central bank will definitely ease or even tighten the monetary policies that will help strengthen. When one is trading currencies, they are listed in pairs; they are always listed in pairs. For example, it can be USD/CAD, EUR/USD, USD/GBP, INR/USD. CAD would be the Canadian dollar; EUR would be the Euro, and the GBP would be the British Sterling Pound or Great Britain Pound.
If you are someone who is trading in these markets and if you are well-versed, which means that you know what you are doing, you will actually end up making a lot of money, just by trading.
What is exchange rate? What is this thing that so many people end up talking about in so many markets in the world? What is this thing that controls the lives of millions of individuals? What is this thing that has transactions that go up to trillions of dollars?
Well, I will answer all of the above questions in this guide. An exchange rate happens to be the value of one nation’s currency, compare to the currency of another nation, or even an economic zone. It is basically the exchanging of currencies between one currency to another. For example, how many dollars does it take to purchase 1 pound? How many rupees does it take to purchase one US dollar? It is very simple. It takes 74 Indian rupees to purchase one US dollar. One pound is worth US$1.3; USD to GBP is basically 76p.
I am sure by now; you know that the exchange rate is basically the value of a country’s currency. Most of the exchange rates are very free-floating. The rise and fall, based on the demand and supply in the market. The rise and fall, every single day. A couple of years ago, one USD was worth 55 Indian rupees, but now it is worth 74 Indian rupees. In a lot of cases, it keeps increasing, which makes it harder for Indians in this case, because it is more expensive. Keep in mind that not all currencies are free-floating, because they have a lot of restrictions.
There are many types of exchange rates.
The first one I would like to talk about is free-floating. A free-floating exchange rate basically rises and falls, because of the changes in the foreign exchange market. This is the most common type of exchange rate.
The next one is restricted currencies. Some countries actually have a lot of restrictions on their currencies, which limit their exchange within the country’s borders. Restricted currency can have its value set by the particular government. It loosely translates to the fact that you cannot purchase or sell this particular currency.
Another one is called currency peg. Sometimes, a country will peg its currency to that of another country’s. For example, the Hong Kong Dollar is pegged to the US dollar in a range of 7.75 to 7.85 which means that the value of the Hong Kong Dollar to the US dollar will remain within this particular range.
Did you know that exchange rates can be different in the very same country? In a lot of cases, there is some on show rate and an offshore rate which you should know about. Generally, a favourable exchange rate can actually be found within the borders of the country, versus outside the borders.
Money is the one thing that can generate a commotion of sorts, even when falling from the skies. Cash is always valued so much that people put in more effort to earn more with time. With plenty of methods to improve your income, there remains an apparent confusion about choosing the right path to huge returns. Attuning yourself to the typical life may help you settle for what you get. But for people with aspirations and giant dreams, plans also need to mammoth. Foreign exchange is the one proven method through which you can start making money. Although millions are investing in the trade, not many of them are aware of the patterns and techniques that can help them build their finances.
Many of these methods are complex, making it hard for beginners and amateur traders to generate profits easily. However, less complicated techniques have been created for these traders to take advantage of. Forex charts would be the most frequently occurring solution when you search for answers to the best method. It is indeed the best way to help yourself with the trading process. Let us look at some of the regularly used chart patterns that provide a relatively simpler path to successful trading.
1. Head and Shoulders (H&S)
The bottoming formation soon after a downtrend or a topping formation after an uptrend is considered as an H&S pattern. Every topping pattern would signify the high price, often followed by a retracement and a higher price high. This trend could continue through volatility from retracement to a lower low. On the other hand, in the bottoming pattern, a lower low occurs right after a retracement, followed by another retracement and a higher low. When the trendline connecting the two highs of the bottoming pattern or the two lows of the topping pattern breaks, the pattern becomes complete.
The shape anyone would be familiar with is used in foreign exchange as a sign of varying trends. Triangles are commonly used in the forex charts on short-term time frames. It is when prices converge upon the narrowing of the highs and lows into a tighter price that triangles occur in a forex chart. There are almost no differences in the pattern of the triangles, but they can have slight changes depending on the market conditions, resulting in the formation of three major types: ascending, symmetric, and descending. Every triangle with an entry, stop, and profit target is tradable, and symmetrical triangles are almost always profitable.
3. Engulfing Pattern
Candlestick patterns are used in many cases to determine the value of the movements in a market. These patterns are always effective in gauging the price movements, further helping with the overall trading decision-making process. The one particular candlestick chart pattern that has been working wonders for the users is the engulfing pattern that indicates a strong change in direction through the easily noticeable price action.
Before we talk about trading and patterns of forex markets, you should know what forex exchange is. Forex or foreign exchange market is a market that is the most liquid market in the world. They deal with trillions of dollars every single day. It is also a market that does not exist in the physical world, which means it is an intangible market. Countless people rely on the forex market for their jobs.
The forex market is actually a place that represents a market where a lot of different currencies would move against one another. It is also a place where you exchange one currency for another. A lot of people make a living by being a forex market trader. The dashboard is actually made up a lot of currencies which are paired with one another, and the traders actually speculate their movements. It actually means that one currency will be worth something one day, and it will be worth something else another day. The values can go up and down.
Forex trading actually represents a huge bet against or in favour of the economy. The economy performs a little better when you have a stronger currency, if the currency weekends, the economy will end up performing a little less. Traders would speculate on the different shapes of the economy, and then they would purchase and sell the currency pairs according to their decent analysis. If they are accurate, the pair would move in the right direction, and they would make a profit, if they were not, a loss would occur.
For example, consider that if a trader bets on the excellent shape of the economy of the United Kingdom, he would buy the currency, which would be the GBP. He would have to buy it against something, and therefore, he will have to choose the currency pair.
The traders that would buy and sell based on the chart interpretations or actually known as technical traders. Technical analysis is actually the bread-and-butter of their trading.
Technical traders make use of oscillators and indicators. They also track the price movement, and they apply a lot of filters to plot support and also at the resistance levels or the overbought and oversold levels of currency charts. Based on the results, traders purchase and sell the currency pairs, and they also speculate on many instances.
Technical analysis actually changed over time, considering many factors which influence the way that the traders approach the market. You should also keep in mind that computers completely changed the way that traders look at the market and the advancements of new technologies that were available, completely alter the face of the forex industry.
Trading is the one form of income that cannot be triggered with some physical effort. You need to put your soul and brain into it to yield great results. Of all the available trading options, forex is the highly profitable one that keeps generating a daily turnover of around $4 trillion. This global market only expands with time as more people are signing up for the services of brokers. The major financial centers of the market are Tokyo, New York, and Hong Kong. Numerous entities are present in the forex market, including broker, institutions, businesses, and banks. If you are considering forex as a potential investment, you must make sure it is the right time and market for you. There are various features that make forex a better option than the others. Let us look at some of the benefits of forex trading.
1. A Large Global Market
The market’s size and scale are always on the top of the list when considering the benefits of forex trading. Traders from any part of the world can join this platform and begin their trade by buying and selling currency pairs. The breadth of the market contributes to most of the benefits of forex trading.
2. Beginners Can Also Trade.
One of the greatest benefits of forex trading is that even beginners can foray into it and make huge profits. Unlike in other markets, large investments aren’t required to enter; the whole process is a lot easier, making it the most popular trading option. The free demo accounts are provided for the amateurs to learn all the activities involved in the trade. Live market simulations on the platform will help develop your strategies and manage them according to the risks.
3. Trade All Day
You don’t need to be burning the midnight oils for this trade since the time zone limitations aren’t applicable here. The over-the-counter approach of the transactions makes it easier for the buyers and sellers to do their part whenever they want. Therefore, forex trading is not limited to the opening hours of centralized exchange systems like in other markets. As long as the market is open elsewhere, you can close your deal at any time of the day.
4. Low Transaction Costs
The forex market not only has a limited capital requirement for entry but also has low transaction costs for every deal. The spreads measured in pips are factored into the price of a pair to generate profits for the brokers. They will quote a selling price and a buying price, and the pip between these will indicate the spread. This value is mostly low, making forex trading a cheaper option.
5. Highly Liquid Market
The ease of buying and selling of assets is defined by liquidity. This factor is dependent on how active the market is, meaning with the 24-hour activity in the forex market, you can expect highly liquid currencies and pair deals.
It is essential that you know that the foreign exchange market is very unique for a lot of reasons, mainly because of the sheer size of it. We all know that it is not a tangible market. It is a market that exists virtually, electronically to be precise. It is a market that exists with the help of telephones, the internet and more. It became huge, and it became much more successful, because of the help of the internet. Trading volumes in the forex market are incredibly large. As an example, I would like to point out the trading in foreign exchange markets are usually averaged at $6.6 trillion in one day, and this was in the year 2019, in April. This was according to the bank for international settlements, which is actually owned by 62 central banks, and it is utilised to work in financial and monetary responsibility.
Did you know that the largest trading centres in the world are located in New York, Tokyo, Singapore and London?
I’m pretty sure that you know that the market is open 24 hours a day, five days a week, across most of the major financial centres all over the world. It basically means that it is open for five continuous days, 24 hours, continuously. It means that you can purchase and sell currencies at any time during these five days of the week. The forex market is not exactly a one-stop-shop. Keep in mind that there is a huge range of varieties of many avenues that an investor will go through, in order to execute some forex trades. You can actually go through different dealers, or you can even go through different financial centres which make use of a host of many electronic networks.
If we are looking at it from a historical standpoint, foreign exchange was definitely once a concept for the governments, hedge funds and large multinational corporations. But, in today’s world, trading currencies is very easy; it just takes a click of a button. Accessibility is definitely not an issue, because it is accessible to anyone who has an internet connection and electronic device that can support an internet connection. A lot of investment firms offer chances for people, where they can open up their own accounts, and they can trade the currencies; this is very helpful, because they can do it whenever and wherever they choose.
When you are trading in the forex markets, you are basically purchasing and selling the currencies of multiple countries. But, there is no physical exchange of money, from one hand to another. It is all electronic, as I have mentioned above. This is very contrary to what happens in a foreign exchange kiosk. Tourists make use of these kiosks.
Cash rules the world with its applications in all the fields of work. Assets are the reason why people keep putting effort into building a better reputation and career. Plenty of currencies are being used across the globe to pay for goods and services. However, it is only a few that make it to the top of the market. Forex trading is conducted across multiple platforms to exchange one currency for another, where the deal is made in pairs. The value of trade will be dependent on the market conditions from where the respective currency hails. Only the economically stable currencies are needed in sufficient quantities in currency trading. Of all the currencies available for trade, the American dollar is under the highest demand owing to the size of the US economy. Let us take a closer look at currency pairs and their working.
What are Currency Pairs?
Currency pairs can be defined as the coupling of national currencies from two countries. This is done to aid in the trading of currencies on the foreign exchange marketplace. Exchange rates are not fixed for the currencies; they keep differing based on the market conditions. All forms of forex trading take placed through these pairs, be it buying, selling, or speculating. Almost every country’s currency can be traded, but only the pairs are consistent in the high value. The most-traded currencies in the market are the US dollar, the euro, the Canadian dollar, the New Zealand dollar, the Japanese yen, the British pound, the Australian dollar, and the Swiss franc. Every primary currency pair contains the USD. One of the major currency pairs that remain highly valuable almost always is the EUR/USD. Some of the other major pairs include:
USD/JPY: Pair containing the US dollar and the Japanese Yen.
USD/GBP: Pair containing the US dollar and the United Kingdom pound.
USD/CHF: Pair containing the US dollar and the Switzerland currency.
USD/CAD: Pair containing the US dollar and the Canadian dollar.
AUD/USD: Pair containing the US dollar and the Australian dollar.
NZD/USD: Pair containing the US dollar and the New Zealand dollar.
The minor currency pairs are the less frequently traded ones with major currencies paired against each other without the USD. These pairs include EUR/CHF, EUR/GBP, and GBP/JPY.
Exotic pairs are the next category, all about pairing a major currency with one from an emerging or burgeoning economy. Some of the most common exotic pairs are USD/PLN (Polish zloty), EUR/CZK, and GBP/MXN (Mexican peso).
The least common type of currency pair is the regional pair classified by regions such as Australasia and Scandinavia. AUD/SGD, AUD/NZD, and EUR/NOK are some of the regional pairs.
I am sure you know what the foreign exchange market is. If you do not, it is simple. It is a market value exchange one currency for another. When someone is making a trade in the foreign exchange market, they are basically purchasing or selling the currency of one country for another. There is absolutely no physical exchange of money, which means there is no exchange from one hand to another. Everything is done electronically, because the entire market exists electronically. This is contrary to what happens in foreign exchange kiosks.
For example, imagine someone is visiting New York City from India. They would be exchanging the Indian rupee for the US dollar, in cash. They may even be charged a commission fee to do so. This person can spend the money in the United States of America. This person could even spend the money in airports in other countries. But, when you exchange currencies in the forex markets, you are not charged a huge commission. In some cases, you are not even charged the commission. In the world electronic markets, traders are usually hoping to take a position in some specific currencies, and they will have hopes that there will be some upward movement and some strength in the currency that they are purchasing or even weakness, if they are selling, so that they can make a large profit.
In so many cases, I know a lot of individuals who get into the forex markets, so that they can trade currencies for a living, so that they can make a profit. In a lot of cases, some people end up making huge profits. It is basically like gambling, but without the lights, sounds or the intense atmosphere of a casino.
There happened to be some fundamental differences between the foreign exchange market and the other markets. First of all, there are much fewer rules, and it means the investors do not have to adhere to such strict standards or even regulations, as those in stock markets, options markets and more. It means that there are no clearing houses and no central bodies that oversee the entire forex market. Basically, the rules are much more relaxed. Keep in mind that you cannot cheat. It is not possible. Secondly, since trades do not take place on a traditional exchange, you will not find the same fees or even the same commissions that you would in other markets, as I mention above. There is absolutely no cut off, as to when you can and cannot trade, because the market is open 24 hours a day, five days a week. It is a very liquid market, which means that you can get in and out whenever you want.
In this guide, I will be talking all about exchange rates and the foreign exchange markets. In finance, and the exchange rate is the rate at which one currency would be exchanged for another currency. For example, the rate at which one US dollar would be exchanged for another currency. We can even talk about the exchange rate of one great Britain pound to another currency. 1US dollar is worth 74 Indian rupees, currently. It is regarded as the value of one country’s currency to the value of another country’s currency.
You should also know that exchange rates are always determined in the foreign exchange market; it is a market that is open and broad range to all kinds of sellers and buyers; currency trading is continuous. It is open 24 hours a day, except in the weekends. It is also an intangible market. It does not have a physical existence. Nevertheless, it is one of the biggest financial markets in the world. There are transactions which exceed trillions of dollars every single day. It also happens to be the most liquid market in the world.
The spot exchange rate actually refers to the current exchange rates of the currencies. The forward exchange rate refers to the exchange rate, which is quoted and traded today but for the delivery and the payment on a future date which is set.
The retail currency exchange market is the market where buying and selling rates will be quoted by the money dealers. Most of the trades are made with the help of local currencies. The buying rate is the rate at which the money dealers would actually by the foreign currency, and the selling rate is the rate at which they would sell the particular currency that we are talking about. The quoted rates will incorporate a certain allowance for the margin of the dealer or even a profit when it comes to trading.
The currency for international travel and cross-border payments is purchased from banks predominantly. Foreign exchange brokerages and various forms of bureau de change are also involved. Some retail outlets source the currencies from bank markets which are actually valued by the bank for international settlements at $5.3 trillion every single day. It was actually valued at $6.6 trillion in the month of April, in 2019. The purchase is made at the spot, and the spot contract rate is discussed. Retail customers are actually charged in the form of a commission or otherwise, to cover the costs of the providers and also to generate a profit. One form of the charge is so that they can use the exchange rate, which is less favourable than the wholesale spot rate. The differences between the purchasing and selling prices are referred to as the bid/ask spread.