What Is Forex Trading?
The exchange of currencies in a decentralized market through a systematic process is called forex trading. The Forex market is the world’s most liquid market. According to a survey, it undergoes a daily trading volume of more than six trillion U.S. Dollars.
How Does it Work?
The forex market is a decentralized market with no central regulation in place. However, there are some general rules that are followed worldwide:
- Currencies are always traded in pairs.
- Each currency pair has a base as well as quote currency.
- Base currency always comes before the quote currency.
Forex trading involves three parties, including traders, brokers, and liquidity providers. The broker acts as an intermediary party to connect traders with the liquidity providers, also known as the market participants.
Forex traders can participate in three types of forex markets, including spot, forward, and futures.
Spot Market – The spot market is the prime market in which traders exchange currencies or other assets at spot rate.
Forward Market – In the forward market, traders enter a contract to buy or sell a specific asset at predefined rates. This type of exchange occurs in future.
Futures Market – In the futures market, traders agree to buy or sell an underlying asset at market price in the future. This type of contract helps traders to avoid the adverse impact of price function in currencies. Future contracts are legally protected and expire after a specific time period.
Traders perform trading with an aim to make profits. In buy trades, profits are made when price rises whereas in sell trades, profits are made when prices come down.
Let me simplify the concept of forex trading with an example;
Suppose you have 100,000 PKR to invest in the forex market and you plan to buy the U.S. Dollar. Doing so will require you to trade the USD/PKR pair. If the current market price of the USD/PKR pair is 160, then it means you can buy 625 U.S with 100,000 Pakistani Rupees. i-e 100,000/160 = 625.
Now let’s bring the trading analysis into play. For instance, if your analysis shows that the price of the U.S. Dollar might rise in the next few days, then you should hold the 625 USD and make profit by selling them at a higher price. Similarly, if your analysis indicates a fall in the price of the U.S. Dollar, then you should sell 625 USD at current market price and buy again at a cheaper price, that will consequently bring you some profits.
Pros And Cons of Forex Trading
Due to high volatility, forex trading is a riskier form of investment. It has both positive and negative aspects that must be considered carefully before investing money. Listed below are some main pros and cons of forex trading.
- Leverage – Leverage holds significant importance for small scale traders. It allows them to open large positions with limited investment. Generally, regulated brokers allow their clients to trade assets worth 30 times more than their actual investment. Some brokers may allow even higher leverage i.e. up to 1000 times or even more.
- Decentralized Market – The forex market is also known as an over-the-counter market with no central regulation in place. The decentralized nature of the forex market makes it less prone to price manipulation as opposed to stock markets or bond markets where insider information can result in artificial crashes and booms.
- Low Cost – Forex trading provides a low-cost investment solution. Apart from paying overnight swap charges and nominal commission/spread fees to trade underlying assets, clients don’t have to make any major payments as opposed to physical businesses where infrastructure expenses are required in the beginning.
- Tax Relief – In most countries, forex trading earnings are not taxable. However, in countries where forex income is subject to taxes, spread betting may still be free from taxes.
- Accessibility – The forex market is easily accessible round the clock. Anyone from anywhere in the world can start forex trading right away after signing up with a broker and fulfilling some basic requirements.
- Liquidity – The forex market is highly liquid. Traders can fill up their orders instantly without any significant price deviation or requotes.
- Dominance of Key Players – Sometimes major players such as governments, commercial banks, hedge funds, and corporate investors dominate the forex market due to their access to information and technological resources. Therefore, it might become difficult for small-scale traders to catch up big moves in the forex market.
- Regulatory limitations – Forex trading can sometimes become very intimidating. It usually happens when brokers indulge in dishonest practices.
- Less residual value – Forex traders can earn profits resulting from the fluctuation of currencies. Forex trading does not yield any interest earning, dividends or bonuses.
How To Start Trading Forex in Pakistan
To start trading forex in Pakistan, traders need to have a PC, laptop, or mobile phone with a stable internet connectivity. Apart from that, clients also need to have a funded account and a trading platform.
Traders in Pakistan have a choice to trade with either local brokers or overseas brokers. Local Pakistani brokers are regulated by the Securities & Exchange Commission of Pakistan (SECP) as well as Pakistan Mercantile Exchange (PMEX). Trading with local brokers is straightforward and does not require any KYC procedures.
On the other hand, trading with overseas brokers requires verification of identity as well as residential address. The process is known as KYC or Know Your Clients. Traders can use their National ID card or a passport to verify their identity. A copy of the driving license is also acceptable. Similarly bank statements or utility bills can be used for address verification.
Forex Trading Communities, Forums, and Discussion Groups in Pakistan
Online forex communities can help you learn forex trading fast. Sharing information and discussion with other forex traders is an effective way to speed up your forex learning.
# 1 Pakistan Forex Forum
Pakistan forex forum is a well-known community of forex traders residing in Pakistan. Multiple discussion threads on different forex-related topics and frequent posts round the clock make it one of the most active forex forums on the internet.
# 2 Professional Forex Traders Of Pakistan
Professional forex traders of Pakistan in another online community of forex traders based in Pakistan. The page has well-known existence over Facebook. The group has more than 12K members. People frequently post materials related to forex trading, technical analysis, and free forex signals on this page.
# 3 Forex Guru
Forex Infuencers to Follow in Pakistan
#1 M Mohsin Sher
M Mohsin Sher is a forex trader and mentor. He has been trading forex for several years. Sher has more than 184K subscribers on his youtube channel. Besides posting forex content on youtube, he also hosts a website to offer coaching services to traders all across Pakistan.
# 2 ABDUL RAUF
Abdul Rauf is another well-known forex influencer from Pakistan. He offers mentoring classes to traders who wish to pursue their forex career. He also educates people on how to set up a forex trading account. You can follow him on his youtube channel to watch unlimited videos related to forex trading.
Frequently Asked Questions (FAQs)
Is forex trading legal in Pakistan?
Yes, forex trading is completely legal in Pakistan. The SECP and PMEX stipulates guidelines for forex brokers in Pakistan. Further, trades in Pakistan can also trade with overseas forex brokers.
What is the best time to trade forex in Pakistan?
The best time for forex trading starts when two trading sessions overlap. The forex market is known to have the highest liquidity during these hours. Given below are the overlap timings for different trading sessions converted in Pakistan Standard Time.
- US/London Overlap: 1:00 AM to 5:00 AM
- Sydney/Tokyo Overlap: 07:00 PM to 09:00 PM
- London/Tokyo Overlap: 08:00 PM to 09:00 PM
Is Forex Trading taxable in Pakistan?
Yes, forex trading is taxable in Pakistan. According to the Federal Bureau of Revenue (FBR) rules, forex profits may be subject to 15% tax.
Can you make money trading Forex in Pakistan?
Yes, you can make some good profits with forex trading in Pakistan. All you need is to follow a workable trading strategy with proper risk management rules .