In these last few years you may have heard people talking about “forex trading” several times. Maybe you’ve heard it from a friend who started trading with a forex broker, maybe in the news, or maybe on the internet.
But now you want to get started and understand more about this industry and the first question that may come to your mind is: what is forex trading in Pakistan?
Trading Forex in Pakistan means buying and selling a currency against another currency at a specific exchange rate in foreign exchange markets, trying to speculate on their price fluctuation.
Have you ever gone to an airport for an international flight and exchanged your Pakistani Rupee for other currencies? Well, that’s forex trading! However, the commissions there are quite high, so that’s highly unlikely you’re going to make a profit once you come back to Pakistan to exchange back the foreign currency you’re holding.
But that’s why there are financial institutions (i.e. Forex Brokers) that help you in the process charging a very small amount of money for each buy-sell operation.
So, are you interested in getting started or simply understanding more about the industry? Keep reading our guide in order to understand what is forex trading in Pakistan.
Forex Trading:
As discussed above, we learnt how currency trading or forex trading is trading currencies in pairs at a specific rate. But let’s dive in a little deeper.
In Pakistan, we often hear how the rupee fell in value against the US dollar or vice versa. Well let’s just loosely say it’s all guessing and postulating of such kind in a forex market. When currencies in pairs are exchanged in the forex market, traders are postulating whether the value of one currency will rise or fall against the other. And that’s how traders might or might not make a profit.
Forex trading in Pakistan:
It’s an agreed upon fact that being a developing country, Pakistani people face a lot of problems earning a sound amount of income monthly/yearly. With an employment rate that’s been decreasing annually for the past 5 to 6 years, things haven’t been easy for us. Under such unfavorable circumstances people tend to invest with different platforms with a good, promising potential. Forex Trading has a near-limitless potential which is why it could be your go-to trading platform with which you want to invest.
The basic underlying concept:
As a newbie, what’s important to be kept in mind and observe is for example if you travel from the US to Pakistan and you want to change your US dollars into Pakistani Rupees. Your 100 dollars will be converted into approximately 15,000 Rs with an exchange rate of 1$=153.45 Rs. Now, as we know, exchange rates fluctuate all around the world for different currencies. And that’s where fluctuating exchange rates kicks in as “investment opportunity.” Now imagine having a platform to trade currencies, (which we fortunately do)! So to sum up, that very platform is Forex Market as discussed above as well.
How does FX trading work and the importance of decision making skill:
FX is the largest investment market in the world which continues to grow annually. It’s only fair and logical to be familiar with all the terminologies and concepts before you start trading in the forex market. As discussed earlier, we know that currencies are traded in pairs. So each currency pair has an “Ask” and “bid”. Ask is the cost for purchasing that currency and Bid is what we will get upon selling it. And the difference between the Ask and Bid is called Spread. Moreover, to calculate that spread we use a terminology called Pip i.e. percentage in points which is equal to 1 over 100 of 1 percent. When you start your forex journey, you realize how important it is to equip oneself with enough knowledge, experience and practice in order to ace decision making skills. Hence, success can be found with the right education. Economic, political, geographical, financial and such conditions and factors of a country contribute to the fluctuations in the currency rate. So it’s of grave importance to postulate wisely which direction your currency pair would move towards. In other words, traders buy and sell according to the direction currencies trend in relation to the other.
Furthermore, since it’s absolutely vital to learn how to trade efficiently and be familiar with the working mechanism of not only currency trading but your broker as well. Leverage is a terminology traders are most familiar with while trading. Which means more buying/monetary power given by your broker which is more than the actual cash in your account. Being a Pakistani forex trader, we like to convert our Pakistani rupee to stronger currencies like USD or EUR. For example we invest 5 lac rupees which we convert into approximately 3250 US dollars. Our brokerage offered us a leverage of 10:1 and we now have a power of 32,500 US dollars. If the exchange rate of US to EUR is 1$ = 1.65 EUR you convert your money to EUR which gives you approximately 19,700 EUR. After a while, when the value of EUR rises and the US dollar becomes more powerful. You convert your entire money in US dollars when EUR rises from 1.65 EUR to 1.85 and you see US dollars getting stronger. Now, since the exchange rate fluctuated, you are now left with approximately 36,445 US dollars after converting. After returning what you owe the broker, you have now profited with an amount of 3,945 US dollars. That’s how you trade currencies. But one must note if you lose you’ll owe your broker the amount he gave you as a leverage on your actual cash. While leverage does have a positive aspect there’s a negative as well. Pakistani traders normally fund their accounts with US dollars and trade with international brokers and trade with currency pairs like US/EUR.
What is now important to know is the type of forex accounts there are. Depending on the lot size, there are 3 types of forex accounts, namely:
- Micro forex accounts: Which allows up to $1000 worth of currencies in one lot.
- Mini forex accounts: Which allows up to 10,000$ worth of currencies in one lot.
- Standard forex accounts: Which allows up to 100,000$ worth of currencies in one lot.
Pros of the Forex trade:
- Most liquid market.
- Trading is happening 24/7
Cons of Forex trading:
- One should be aware of the risk there is in case of leverage. Because in the said case even if you are holding large positions, there is very little money of your own. In the case of loss, you might owe your broker a very handsome amount of money.
- Requires a lot of knowledge and education of the economies of different countries and a solid understanding of their changing behaviors.
How to get started:
If you are set on trading in FX market and are intellectually and financially ready, all you have to do is:
- Get a stable internet connection which you are sure would never go down or shut off. Which means, the most reliable one.
- Choose a broker. Pakistani mostly make an account with international brokers due to absence of regulatory bodies in our own country. Pakistanis can trade with:
- Forex.com
- AvaTrade
- Etoro
- Octa FX
- Olymp Trade (And these are to name a few only.)
- Select a platform. (E.g. Metatrader 4 or 5 etc)
- Fund your account
- Start trading
The most important of all “points to ponder” – Is FX trading regulated in Pakistan?
Forex trading, fortunately, is not only legal but also regulated by the Securities exchange commission of Pakistan (SECP).
Bottom line:
Forex trading in developing countries like Pakistan may be a good option to boost economy and gross income in the long run. But it’s absolutely vital to learn how to trade first. It’s not for everyone. Many brokers offer a dummy trading account first which is an excellent opportunity to learn with fake/virtual money. Determining the winning trading strategies is a lot of work and requires quite a lot of practice hence the effort which goes into earning profits. An understanding of macroeconomic fundamentals and factors that fluctuates and controls the currency values is one of the most significant prerequisite for new forex traders.