Okay. So in this Blog you'll learn what forex trading is and how it works. So what exactly is Forex? So for X stands for foreign exchange right for goes with foreign and e^x is exchanged.
So when you hear about forex, you're basically referring to foreign exchange. So forex trading is simply the trading of one currency for another right?
So this is something that I would say 99% of us have at least one point in time right dabble in forex may not be you know, electronically know where you're going along one shot but physically when you let's say you're going for a holiday, let's say I'm in Singapore and I'm going to Malaysia for a holiday. So if I want to go to Malaysia for a holiday, I need to spend Malaysian Ringgit in Malaysia, right? If you go to us for holiday, you spend USD in u.s.
So in order to get Malaysian Ringgit, I need to sell my Singapore dollars for Malaysian Ringgit. So this is one form of forex trading right you're selling your own domestic currency for foreign currency. So you can spend the currency in the foreign country that you're visiting. So this is a one form of forex trading so who treats for x and y so forex is largely treat by your banks, like central banks banks corporations and retail traders. So just let me briefly explain to you, you know why they get involved in the forex market.
So for central bank is usually meant to intervene the FX markets perhaps, you know, their currency is appreciating too much and they want, you know, remain competitive for the export so central bank can intervene in the FX market for example in 2012. You have the Swiss franc right back against the euro because the Swiss frame was appreciating too much against the euro in a central bank intervened impact the euro at one point too. So this is an example of the Adonis central bank intervening in the FX markets.
Then you have banks red line Oh deutsche bank Goldman Sachs HSBC is right where they are basically they trade Forex but as a form of market making to provide liquidity to corporations and as well as they do to hedge their their their book right in case you have any currency he's right these banks would also, you know trade the forex trading forex market but the things I want to point out is no banks and corporations. They have close working relationship because for cooperations for corporations, right?
Let's say for example, you you are a car maker. Let's say I'm a Toyota right I manufacture cars but the thing is that my car spare parts. I'm not found in Japan. I may have to go to countries like maybe China or India to source for this spare parts. So if I'm the car maker to Europe, all right, and I need to buy these spare parts or rather to buy the raw materials for to manufacture my car. I need to get them in the foreign country.
So what I'll do is that I will sell my own country Japanese yen for say the Indian rupee, right?
So I got the Indian rupee and I can go to India and by the relevant materials that I need. So this is another form of our forex trading for corporations where they typically no sell their own domestic currency, right and in exchange for a foreign currency to buy in or whatever relevant spare part more materials that they need. So this is you know, how corporations are, you know dabble in the FX market as well, right? They also dabble in the FX market so we know H, whatever positions that you have there could be no exposed to currency risk and last but not least you have the retail traders like me and you who speculates in the forex market right - to earn a profit right - no and and this is something new and I believe this is the reason why you're watching this video right now to learn how to trade the forex market.
So this is where retail traders come in. So one thing to note right I want to share with you the hierarchy, right? So it's known this is the map. Let me share with you the how how it all works on this ecosystem. So you can see what your central bank are the largest right over here. And then they followed by Tall this a major banks like no entire comon JP Morgan and whatsoever. So all these major banks they have relations with you know, investment funds commercial company like no Toyota Cadbury stuff like that or maybe you know CH funds and and who wants to you know trade in the FX market. So all these banks ready. Typically we have connections to commercial companies and you know large funds or last Speculator and on top of it, right?
They also have connections to market maker. Right right where you'd treat from your broker ITF connections to your broker, right? Okay market maker or ECM broker and stuff like that.
So from then on right this is where your own broker have connection to you the retail trader through their own trading platform. So this is how the ecosystem work. Right? No banks would communicate with your own retail brokers commercial companies or investment funds, right? That's something that they will dabble in all three categories right for the banks. All right, some of them may just choose to focus on investment funds some to just focus just on commercials company or maybe some, you know, can you know have dealings with all three different categories? Okay. So but you as the retail trader you only have you know access with the connection with the market maker who then you know might pass on your order to the bank connection directly may or may not depending on you know, what depending on how your broker established your owner the trading system. Okay.
So with that said, right this is a the ecosystem and to look at a hierarchy, right? This is a source from maybe pits, right? You can see that major banks. They are the top right they deal with the most number of I mean they put in the largest orders, right Andy typically, you know communicate with one another using this system right the EBS system. Okay, and then uh further down the food chain is where you have, you know, your retail market makers, right, you know the brokers the EC ends, right? And this one over here, they put it a hedge funds and commercial companies at the same level. But to me, I would say this group of traders are typically one level above a retail trading right? I would say somewhere around here where this hedge funds and commercial companies and last but not least is retail traders like, you know, you and me who trades the FX market. So this is the food chain, right?
It's a fact right? So this is why you know retail traders, right? You don't move the market markets. I usually move by the big players which I shared with you over here right at the top of the food chain. So moving on what are the advantages of forex trading right number one high liquidity, right? So whenever you put in an order into the forex market, you don't have to worry about, you know, getting a full price or sleep pages because there is usually a huge amount of liquidity and you pretty much me to enter really lunch lot sizes to even move the market so you don't have to worry about nowhere you get filled or not. Chances are you know, when you hit the market you pretty much get a price which is close to you know, what you see on your screen second thing is low barrier to entry so this means that now anyone can you join or treat the forex market right unless your your country sort of like been forex trading but if not, right what's there to stop you from, you know opening an online account?
Right and just some another necessary paperwork and you can you know be trading Forex. That's a thing is a better risk management why I say this is because Forex allows you to trade, you know, very small lot sizes, right you can trade after you know micro lot or even they know lot. This is a really small lot sizes that allows you to better manage your risk, you know, unlike stocks, right? Like for example, you buy say a one share of a blue chip stock in Singapore. I have to buy at least one lot right?
There was I think sometime back in Singapore by one lot of shares is at least 1000 shares. So if your account size is too small, you can't even buy one lot of shares in Singapore. So compared to 4x right you have better risk management because they let you trade really really really small sizes. And then you have no trait anytime you want 4x is you know trader twenty four or five right Monday to Friday. So, you know, you can wake up in the asian session put in an order manage your trade or in the London session in the New York session.
You can pretty much you know trick anytime you want right unlike the stock markets where it's usually open for, you know, eight hours a day right during the doing the respective time zone that you're training it the particular stock market and one last thing is know forex trading you have low transaction costs, right?\
So in Singapore, I again back to to reference back to Singapore whenever you know, I buy say shares. All right, the minimum transaction cost to buy is $25 and when I sell is another $25.So one thing about forex trading is that there is no transaction cost. You only usually pay the spread. Okay, you may pay transaction costs depending how your broker want to charge you but typically right you don't have to pay transaction cost in forex trading you just pay the spread. So if you think about this right in singapore, let's say i buy some shares were for let's say five hundred dollars. Okay, and one buys is $25 one cell is $25. So before you know that see let's here when i buy the share price $25. So $500 value right?
Let me just get it down to kind of show what I mean. So let's say right I want to buy $500 worth of shares, right? You know that transaction cost typically in Singapore is 25 bucks. So 25 divided by 500 when I buy the shares this is equivalent to five percent, right? So I'm really down five percent even before the market. I mean even before, you know the moment I put on the trade, I'm really down five percent and this is still taking into consideration the spread on the trip that I've paid right?
I've not included it here but for simplicity sake what I'm trying to say is that when you trade stocks if you have a smaller come or rather you are buying a small number of shares a small nominal value that fixed transaction costs will into a huge percentage of your returns. So for this right, you ready down 5% from the start for stocks, whereas for Forex, right? You don't have this. Uh, you don't have this so-called transaction cost. You only pay the spread which is something that we will talk about later.
So this is one of the advantages of you know, forex trading as well. So just a quick recap right? Forex trading forex trading is the exchange of you know currencies right? It's traded by banks corporations and retail traders like you and me and the advantages of it is, you know, it has high liquidity low barrier to entry batteries management you can trade any time and it has low transaction costs. Okay.
So with that said, I have come to the end of this Blog and I'll see you in the next blog
Thank You
