Foreign exchange commonly referred to as Forex, is the exchange of one currency for another at an agreed price. This is different from the old way of exchanging currency because it is completed in an over the counter (OTC) market. Foreign exchange has become the world’s most traded market, grossing over $5 trillion dollars every day!
What Is An OTC?
In general, a market is listed as OTC because it does not meet the listing requirements necessary in order to trade in an exchange. Over the counter markets are run by organizations that negotiate with one another until a deal is agreed upon. The stocks are generally referred to as “unlisted stock” and are traded on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets.
How Does This Affect Forex?
Expanding your portfolio to include forex depends on your desired level of risk. Forex is a leveraged or margined product. This means you must deposit a small percentage of what you wish to invest when placing a trade. On the other hand, the potential for profit or loss from the initial investment is much higher than most traditional trade markets. To help you make the best decision, Bcapital will always discuss risk management and different options before you place a trade.
What Prices Should You Expect?
Every trade option has a base currency and counter currency comparison. The base currency is the currency on the left and the counter currency will be located on the right. Therefore, every opportunity will show itself in terms of one currency vs. another.
Here Is An Example
If we compare a trade option between two currencies like the Canadian dollar (CAD) and the Euro (EUR), CAD would be the base currency and EUR the counter currency. The pricing is dictated by the strength of each respective currency. Therefore, if the CAD has appreciated in value, the price of exchanging a CAD for an EUR would be less than exchanging a CAD for an EUR.
If you are led to believe that a base currency will strengthen in comparison to the counter currency, buy the base currency. The value of your forex trade will improve significantly. Alternatively, if you believe a base currency will weaken in comparison to a counter currency, you would sell the base currency in value against the counter currency.
What Determines Forex Pricing?
There is a multitude of factors to consider when determining what to trade ranging from political conditions, economic conditions, investment flow, or international trade patterns. The vast range of deciding factors makes this market exciting. The forex market is ever changing because a small event can have a large impact on a market. Below is a short list of some key factors to note.
- Monetary Policy
- Natural Disaster
- Currency Intervention
Bcapital is invested in helping you reach the top of your investing game. The forex market is hard to understand but it is possible with help!