Forex trading has grown popular all over the world. People from all walks of life are involved in Forex trading. However, not all Forex traders are aware of Forex trading. This article explains Counter trading for our Forex trading readers.
What is a countertrade?
Countertrade is a two-way international trade in which goods and services are exchanged for other goods and services rather than hard currency. This international trade type is more common in developing countries with limited foreign exchange and credit lines. Counter trades can be divided into three major categories: barter, counter buy, and offset.
What is Counter Currency?
Definition of counter currency: Counter currencies are the second most listed currencies in currency pairs and are often referred to as “estimate” currencies. Trading currencies can be confusing at first, as you always have to process one currency pair. The first currency of the pair is the “base” currency. The second currency of the pair is called the “quart” currency or the “counter” currency.
A quotation then determines how many units of the counter currency are required to purchase one single/base unit of the involved base currency. The quotation of a currency pair usually consists of two different price points. Similar to the stocks that are traded on the exchange.
The “Bid,” usually lower than the “Ask,” it is the price at which a buyer, trader, or a broker wants to buy the base currency in return for the quote currency.
Ask or offer, is higher than Bid, it is the price a broker wants to sell their base currency in return for the quote currency.
If the Bid price for a EUR/USD pair is 1.2750 and the Offer price is 1.2752, the difference, 2 “pips” in forex trader slang, is the “spread.” Most Forex brokers get trading profits from spreads, so it is useful to check the broker’s spreads before making a trade. In this example, you would pay $ 1.2752 to buy 1 euro.
Working counter trading
Cash does not change in counter transactions where goods and services are traded instead of money. This is often referred to as bartering and is the oldest type of counter-trading arrangement. Many governments are reducing trade imbalances between countries by taking advantage of the countertrade international trade system.
Companies considering counter-trading typically want to expand into foreign markets, increase sales, build customer-supplier relationships, and overcome liquidity issues. With this in mind, countertrade is primarily used for several fulfilling purposes in Forex trading.
Advantages of Counter Trading
Despite the complexity, companies still use counter-trading as a growth strategy. It is due to the following reasons.
- Allows you to enter difficult markets.
- Increase business sales where you may not otherwise have a business.
- Overcome credit problems.
- Allow returns or disposal of surplus products.
Disadvantages of counter trading
The disadvantage of counter-trading is that the value of the transaction (the exchanged commodity) is uncertain, and the price can fluctuate significantly. Other drawbacks are:
- Time-consuming nature.
- As with any unconventional tactic, a good deal involves negotiations, so expect long and delayed negotiations until all parties are satisfied.
- The complexity of the negotiations.
- Higher transaction costs (including, for example, brokerage fees). Costs can be added quickly, especially if you find a fee to the purchaser of the item, the broker, etc.
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