Do you really know what is traded in the Forex Market? How many times have you ever wonder or has someone ask you this question, “what is traded in the forex market?” and you mumble because you either have any idea or have never thought of it.
Many Forex Traders don’t know what is traded in the most liquidated market in the world. Some might say money, yes, kind of true, if we trade money, how come we don’t owe this money? Funny right, if it isn’t money then what is it?
What many traders don’t know is when you trade Forex, you are simply “betting” your money, that is the money available in your trading account, against the economy (currency) of another country. Understand, that i had to use the word “bet” because nothing physical is being sold or bought from our own side, to fully understand why i used this word let me give an example with EURUSD, a trader believe that the EURO will gain a bullish momentum against the US dollar probably because the United Kingdom agreed to come back to the European Union (EU).
He then quickly buys 1 lot of EURUSD, technically, what happens is that this trader just betted 100,000 unit (unit is like the bundle of currencies traded) of the EURO against the equivalent of the USD (if the exchange rate as at then was 1.23218, then the equivalent will be 100000 * 1.23218 =123218 unit of USD) remember nothing physical happen here (except from the broker side where the units are exchanged) if i should further explain this, it will be equivalent to the trader agreeing to bet a certain percentage of his money because he believed that the EU economy is doing great and will be better than that of the US in the future.
The trader just have to sit, wait and see if his predictions are right, if they are right, then the price of the EURO will increase because thousands of investors, mutual fund, companies, banks and also retail traders etc. Will have to buy the EURO thus driving the price of EURO higher. If trader’s prediction is right, he will make profit but if the reverse happens and this trader is wrong and probably Germany, France with 5 other European country decided to leave the EU then well – i believe you know what will happen to EU economy it will fall.
Does That Mean All Forex Traders Are Gamblers?
I know most of you will be wondering is forex the same thing as betting, well not quite because you see unlike betting the winning from forex can be huge as well as the loss. With a well money management, you can see that forex is profitable in the long run. While in betting, your profit as well as your loss is fixed this make the probability of winning and losing 1/2, when the odd are against you for a certain time period you find out; that means you are out of the game.
Secondly, the economy of every country is tied to the inflow and outflow of money, with a stable economy, investors will come to invest in different sectors of the economy and the banking sector will strive. As Forex Traders, we are mare speculators who want to make profit when the economy is falling and when it’s raising.
In summary, though lots are traded (from the broker side which is the exchange of unit) nothing physical is traded. What generally is traded in the financial floor is just this unit we call lot, similar to shares in a company they are not tangible –like something we can hold, smell or feel but we acknowledge that these are what when sold or bought can give us a few bulk.
NOTE– the exchange rate is the reflection of the condition of a country’s economy, compared to other country economies.
With this fundamental knowledge am sure that next time you are asked what is traded in the Forex Market you will be able to say a thing or two. Please do share this articles with your friends and do comment below, I will love to hear from you and do not forget to like our Face book page as well as subscribe to get the latest posts.