What is forex trading?
Forex trading is a compound of foreign currency and exchange. Foreign exchange is the process of converting one currency into another for a variety of reasons, usually for commerce, trading or tourism.While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken with the aim of earning a profit. It is also known as FX trading with a trading volume of a whooping $5 trillion.
Popularity
FX or current trading is a decentralized global market where all the world currencies trade. It is the largest, most liquid market in the world. All the world’s combined market stocks don’t even come close to this.
What is the Forex market ?
If you have travelled overseas, you are most likely to have made a forex transaction. For example if you want to convert your pounds into euros, the forex trading market based on supply and demand- determines how many euros you get for your pounds. And the exchange rate fluctuates continuously.
If a pound is 1.20 euro on Monday and 1.19 euro on Tuesday, this may not seem a big deal but at a bigger scale, it makes a huge difference for instance for a company which has to pay salaries to the overseas employees, the few pennies add up quickly.
There are several key differences between swapping currencies abroad and buying or selling forex.
- The first is convenience. The forex market is a decentralised, electronic exchange. Accordingly, participants are able to trade currencies from anywhere, anytime the market is open.
- The second is efficiency. Forex traders enjoy the utmost in liquidy, which promotes tight spreads, regular volatilities and rock-bottom pricing.
Participating in the foreign exchange market is the easiest, most efficient way of exchanging currencies. Instead of waiting in a long line at a currency dealer and paying undue premiums to trade money you simply need computing power, internet connectivity and an FX broker to engage the world’s currencies.
Is Internet forex trading legal ?
Trading with Forex is a completely legitimate activity. Remember that you do it every time you need to travel abroad and there has never been any legal restriction. However, it is a bit different for those who want to make a profit from currency exchanges.
Forex trading is a legal business but forex traders can trade only through domestically licensedbrokers in some countries. It is completely legal like futures, stocks or commodity trading. However, forex brokers need to be regulated where their jurisdiction is.
While forex trading is legal, in the trading industry, there are shady unregulated brokers, scammy marketing techniques, scams that promise quick fortunes through “secret trading formulas,” etc.
On the other hand, some countries have made Forex trading illegal because Forex trading is a risky business and can cause great losses. Other countries have imposed major restrictions on Forex trading.
Hence many people interested in Forex trading ask the question in which country is forex trading legal? While many developed countries allow citizens to make money trading in Forex, some countries have many restrictions. Belarus, Canada, China, India, Japan, Iran, Pakistan, Saudi Arabia, South Korea, and Turkey are (some) countries where traders should operate only through domestically licensed brokers.
Reasons for banning Forex trading
Safety – A major reason:
It is indicated by data that the Forex market is among the riskiest retail traders, with new traders most likely to lose, thus it is unsafe and can cause huge losses.
It is indicated by statistics that 96 percent of Forex traders fail in the market and quit trading! That’s a huge number. However, traders who have good managerial skills and a clear strategy for trading are able to make huge profits also. But, the bitter reality is that we have only 4 percent of the traders who survive in the long term.
Consequently, Forex trading is made illegal in some countries and faces restrictions in the other, because these countries do not want their people to invest their hard-earned money in Forex and most likely lose it.
Many countries regulate forex trading and formulate new rules and regulations to protect its citizens and prevent monetary losses.
Leverages
Traders can use leverage in Forex without having to invest money , when leverages are used losses do not appear real. The traders are allowed leverage by their brokers because they have to pay for the losses. These leverage-related losses are one of the main reasons behind the ban of Forex trade in some countries and strict restrictions in the other.
Fixed Currencies: (A minor reason)
The exchange rate system in a country is either fixed or floating. The price is not fixed, it keeps on changing rapidly as the currency’s price varies depending on the supply and demand of the currency for the floating exchange rate. However, some countries have fixed exchange rate systems and the government works with the central bank to keep the currency price stable.The countries where the exchange rate is floating impose fewer restrictions than those where it is fixed.
Bottom line
Due to the high risk, it is advisable to understand the concepts involved before investing. Since trading is hazardous, many countries have imposed stringent regulations on Forex trading to prevent their citizens’ financial losses.
