Many have heard of the opportunities of large earnings on Forex, but not all clearly understand what kind of market it is and how to earn on it. In the view of some, there is a large collection of counters, on one side of which there are sellers and on the other side there are buyers. But the reality is different.
The market began to take shape in the 1970s. The world’s rejection of the gold standard in 1976 led to the creation of the Forex. Since then, countries have adopted the Jamaican system. Exchange rates have become market-dependent rather than State-based. These developments have contributed to the normal functioning of the world economy. The exchange of capital between different countries has become fully possible. Today, the daily and increasing turnover of the international trading platform is between $5 and $7 trillion.
Forex is an international global market. Currencies are in the shape of commodity here. The name FOREX means «foreign exchange». It is acceptable to compare this market to an exchange where one currency is bought (or sold) for another.
For example, if in the near future it is known that the US dollar will increase in price, it can be used to make a profit by buying and reselling the US currency at a favourable price. Financial transactions in the international market take place in the same way, but with larger amounts.
Forex offers the possibility of obtaining a profit due to the exchange difference. The exchange rate is defined as a unit of one currency, expressed in units of another. If demand for any currency falls, it becomes cheaper. So the other monetary unit is starting to get big demand, and its price is rising. You can make money by lowering prices as well as rising prices.
The Forex prices are determined by agreement between the bidders depending on the demand and supply of the currency.
Among the many features of the international trading environment, however, the most important are:
Forex from a trader point of view
The trade pattern in the international monetary market can be summarized as follows. The trader, using a special program, monitors the charts of the traded assets. After analyzing and deciding whether to buy or sell, he submits a command to open a trading position. The command enters the server of the broker on whose website the trader is registered.
The broker, using information from the liquidity suppliers, immediately gives the client the current result on this and on its trading terminal. Depending on the circumstances, the transaction may be profitable or unprofitable. Subsequently, while observing the price of the asset, the trader decides on the closing time of the transaction. It is possible to do this manually or automatically, by issuing orders in advance on the profit and possible limitation of damages.
Unlike stock and commodity exchanges, Forex does not have a specific trading platform.
Regional currency markets serve as workplaces for the realization of banking transactions. The most important are: Asian, European, American and Pacific. The interaction of the platforms takes place through the latest information technologies.
Trading is done via the Internet or by telephone. This can be done 24 hours a day. Exceptions are holidays and weekends. There is no specific schedule of trade sessions on Forex. Various banks start their operations at different times, reflected in the formats GMT, EET (Eastern European) and GMT+3 (Moscow). There is summer and winter time.
The development of Forex rapidly contributes to the emergence of new traders.
They can be divided by importance into several groups:
Central and commercial banks
They account for the lion’s share of all foreign exchange transactions in the interbank market. Other bidders in these banks keep their accounts through which they conduct financial transactions. As Forex regulators, central banks manage international reserves and conduct foreign exchange interventions. In this way, the CBs and the Treasury influence demand by increasing or reducing the supply of national and foreign currency.
The FED (United States Federal Reserve), the European Bank, as well as the Central Bank of Germany, the United Kingdom, and Japan are quite prominent representatives of the first group. It is the stabilization of the exchange rates of national currencies and the replenishment of their reserves, rather than profit, that is the main task of the first group. By injecting large amounts of money, the CBs have a very significant impact on the market situation and on fluctuations in exchange rates.
Commercial banks represent a significant number of counterparties that mediate the financial transactions of their clients.
The purpose of these counterparties is to obtain profits from market operations and commissions from the customers. Deutsche Bank, Citibank, Standard Bank and Union Bank of Switzerland are the largest commercial banks.
The placement of funds in corporate and government securities is their main activity. International corporations in turn invest these funds in production abroad. Normal financial activity requires a constant exchange of one type of currency for another.
Payments or transfers of funds through commercial banks are made online. However, due to the difference in exchange rates it is more profitable to buy a currency on Forex by yourself.
Currency exchanges, brokerage and dealing companies
Currency exchanges do not participate in exchange transactions as individual members of the market, but they do shape its structure. Although some countries have such organizations that exchange currencies for legal persons. In this case, the exchange rate is heavily influenced by the State itself.
Brokerage companies act as intermediaries. They take a percentage of the value of the transaction to connect the sellers with the buyers. Quite often brokers are intermediaries of trading corporations, investment funds and companies.
Traders, or individuals. Since 1986, they have been given an excellent opportunity to invest money in trading on Forex. The development of the Internet, correct forecasting of the dynamics of exchange rates, the optimal choice of trading strategy allows them to get a good profit on the exchange rate difference.
In addition, individuals engage in non-trade activities in foreign tourism, the purchase and sale of cash currency, and the collection of fees and pensions.
Any monetary unit on Forex is expressed by using a three-letter code. For example, a pair of «British pound / US dollar» appears as follows: GBPUSD. The currency on the left is called the base currency (in this case GBP) and the one on the right is the quote currency (in this case USD).
Since any asset can be sold or bought, there are two prices:
Spreads = the difference between bid and ask. These are the earnings of a brokerage company, a commission without which trading is impossible. The spreads are paid once — at the opening of the transaction.
The volume of any transaction is measured in lots. The standard is 100,000 base currency units. Previously, private individuals were not able to trade on Forex because not everyone had such a sum of money. Now, thanks to the leverage, any member can engage in trading. It is this particular circumstance that has made Forex so popular.
The leverage of the broker provides a collateral sum (margin) on the deposit of the trader. Hence the name — margin trade. For example, the leverage 1:100 implies that a Forex transaction can be made with a sum 100 times smaller than the transaction amount. A special platform — a trading terminal — allows to realize trading operations. The broker provides it completely free of charge. On the site you can choose and download the most suitable option.
The GBPUSD asset can be used to visualize the transaction process.
After analysing the situation, we see that there are all the prerequisites for the asset’s depreciation.
At a certain point, when the rate was 1.4200/1.4204, it was decided to enter the market for sale. In other words, sell 0.1 GBPUSD lot (10,000 GBP) at 1.4200.
It turns out that 10,000 GBP were sold and bought at 10,000 * 1.4200 = 14,200 USD. You don’t need 14 200 USD to make this deal. It’s enough to have 142 USD — 100 times less. The missing money is kindly provided by the broker.
After the price of the GBPUSD asset reached 1.3655/1.3659, the order opened the opposite position on the purchase, closing the previously open one for sale. Thus, the purchase of 10,000 GBP takes place at the rate of 1.3659. The difference, which is the profit, is equal to
142.00 — 136.59 = 5.41 USD