You might have heard of the stock market or must have come across this word once in your life ? It simply stated, the stock market is the platform where the stock exchange takes place with certain risks and rules or regulations that must be followed. One can invest in the interested business or company and can sell it in the future, in order to gain profit or minimise the potential loss on rsqtrade .
Similarly, there is a Forex market . Before we learn why Forex trading is important for diversification , let us gather some basic information about the Forex market and how to trade in it .Firstly , the question is what is a Forex market ?
What is the Forex market ?
Forex market is the platform that allows the exchange of the currency at a certain rate that fluctuates from time to time . Here , the currency is traded for another currency. It is also known foreign exchange or FX . For example: trading Euro for US dollar.
Forex is the largest and most liquid market in the world, where an enormous amount of capital is exchanged everyday. There are certain rules one must follow but not too strict rules . Hence , it makes it more simple to use . One can easily trade on this platform with required knowledge and information.
Forex market is an electronic network of banks , brokers or individual traders. The individual traders mostly do the trade through the back or broker . Hence, it is an online platform that provides the flexibility of operating it from any corner of the world with the basic requirement of the internet connection.
What is the exchange rate?
The exchange rate is termed as the rate of change of the currency. Exchange rate fluctuates according to the market.
When trading currencies, they are listed in pairs . Such as USD/EUR, EUR/JPY , USD/CAD etc. With each pair , a value is associated. Such as USD/CAD is 1.2345 . It means that 1.2345 Canadian dollars are required to buy 1 US dollar or 1 US dollar is equivalent to the 1.2345 Canadian dollars .
The exchange rate fluctuates according to the ups and downs of the market. So , the Forex market is a platform for the exchange of currency, just like we exchange currency in the local bank . But the basic difference between the two is that there are certain fees or exchange fees that are charged for the exchange in the local bank . But in the Forex market, there are no additional charges that are charged for the exchange of the currency . Hence , it is more convenient and profitable.
So in simple words , The Forex market is a global platform for the exchange of the currency , without any additional charges.
What is Forex trading ?
Forex trading is the trading of one currency for another, in order to gain profit or to avoid the potential loss in the near future or in the long run.
Why is Forex trading important for diversification?
As the well known phrase states “ Never keep all your apples in one basket” or “Never keep all your eggs in one basket” , it’s a wise choice to store apples or eggs at different places. Because there is always a risk of it being stolen or getting overripe . When the apples or eggs are stored in different places, it increases the chance of survival . Hence , it is advisable to not store all your apples or eggs at one place .
Similarly, it is wise to invest the money in different places, in order to avoid any unwanted losses. Diversification is the most efficient way of managing the losses in the Forex market. Hence , diversification is key to maximise the chances of profit or minimise the potential loss.
Forex trading is subjective to the market risk . Which means that there are chances that the given currency might have a downfall in the market value with respect to the other currency . And hence , it may cause a great fortune to the traders. So in order to avoid unpredictable losses , it is wise to trade currency according to the market trends. Diversification opens the gateway, of recovering the losses or to minimise the losses.
Conclusion:
Forex market is the platform of exchanging currency. Diversification provides the advantages of maintaining the profit/ loss with the changing market trends. Diversification is important in the forex market, as it is the exchange of the currency or trading of one currency to another. And the exchange rate keeps on fluctuating with time . Hence , having different currencies or trading currencies can buy you out of your losses or can minimise the loss. Hence , diversification is important in the Forex trading.