Forex Market

The name “Forex” is formed by combining parts of the two English words “foreign” and “exchange”. When it comes to the foreign exchange (Forex) market, it becomes clear that this refers to the market where currency trading operations are carried out.

The history of the Forex Market began in 1971, when the United States unilaterally abandoned the convertibility of the dollar into gold (the so-called “gold standard”). The final formation phase fell in 1975–1978. It was then that an agreement on establishing a new international monetary system was signed in Jamaica. The largest IMF member countries were no longer tied to gold. The exchange of their national currencies could be carried out at a free exchange rate. In 1978, the International Monetary Fund approved this position. This is how the global currency exchange system appeared, which became known as the Forex Market.

The Forex Market is an interbank over-the-counter foreign exchange market with a turnover exceeding tens of trillions of dollars every day.

Its real participants are:

• Central banks of the states. They carry out currency interventions — operations to ensure the optimal exchange rate of the national currency.
• Commercial banks that carry out conversion operations in the interests of customers, such as payments, deposits, and loans. It is the banks that are the main market participants, conducting currency exchange from their own funds, in order to meet the demand of retail customers and finance investment activities. Due to the predominant volume of banks in this market, the international currency market can be considered interbank.
• Currency exchanges. In some countries, there are national currency exchange platforms that provide conversion operations for traders, although globally Forex remains an over-the-counter market.
• Companies which are engaged in international trade or investing abroad. Only some of them have direct access to the market, the rest of the companies work through commercial banks. This real foreign exchange market is served by a very limited number of large information and dealing companies, such as Bloomberg or Reuters. In their network, the participant receives a quote and makes a deal. Somewhere, incoming orders are processed manually, and there is no gateway or routing of client requests.

At the same time, the cost of one operation can range from $100 to $500, and a subscription to one terminal costs 2-3 thousand dollars per month. Of course, such a system will not process millions of applications from retail customers for several thousand dollars each. The standard lot is $5 million; the minimum lot is $1 million.

What Is the Forex Market That Is Available to Retail Investors, and What Can Be Traded on It?

The Forex Market, where individuals with small capitals can trade, does not allow for transactions on the actual purchase and sale of foreign currency. The investor monitors the exchange rate and makes bets on the rise or fall of the exchange rate. The intermediary in this Forex market is a dealer company (a legal entity) that has concluded transactions with sellers and buyers.

The Forex dealer uses several trading technologies for its clients:

• Dealing Desk. The dealer, who is also the counterparty for all trades of the bidders. There is maximum freedom for the organizer of the trades here — he sets spreads, leverage, commissions, and changes quotes. Along with this, this technology assumes a conflict of interest — if the trader has a loss, then the dealer makes a profit, and vice versa.
• No Dealing Desk. Some of the requests are satisfied with counter requests from other traders. The uncovered difference goes on its own or through a broker to the real currency market. The dealer profits primarily from spreads and commissions, there is almost no conflict of interest. It is beneficial for the dealer to have a large turnover, as this will increase his earnings.
• Straight Through Processing. The dealer collects bids from bidders, forms a final bid for the liquidity aggregator. There are also orders from liquidity providers (market makers), who form the main supply and demand, setting the spread, and making money on it. The dealer’s income is the commission of the participants.
• Electronic Communications Network. The dealer becomes practically the organizer of an analog of an electronic exchange platform. The system accepts applications from traders and liquidity providers, and a common order book is being formed, which all participants can see. The dealer earns on commission, the spread goes at the best prices, and there is no conflict of interest. Thus, Forex brokers have an excellent opportunity for almost risk-free earnings. But even for traders with investors, such trading looks attractive.

Features of Forex Trading

Forex trading has a number of advantages:

• Minimum entry threshold. Many companies that provide access to trading talk about the amount of a standard lot of 100 thousand units of currency, but in practice most of them allow trading to start from 10-100 dollars, even from 1 dollar.
• Work without interruption. Since the Forex Market operates all over the world, quotes are constantly updated (the exception is the break between the closure of American trading platforms and the opening of Asian ones, weekends and international holidays).
• The possibility of short and long trading. The main instrument in the Forex Market is the currency pair. For example, the pair of euro/dollar, the exchange rate of the euro against the dollar is taken. Buying means that you buy euros for dollars, and sell the other way around. Both deals are made through the broker’s access to the market, not by direct ownership of the asset. You can trade without leverage.
• Potentially high returns, but with significant risks. Currency fluctuations are often low, so Forex trading comes with leverage. The profitability of such operations can be relatively high; some traders may achieve very high returns, though this is rare.

There are differences in trading with a Forex dealer from stock trading:

• The trader simply makes a profit after closing a position, without becoming the real owner of the assets.
• To buy or sell an asset, you do not need to change the account’s currency to the one in which these assets were denominated.

For beginners, in particular, there is a significant risk of trading on the Forex Market. If you do not know how to trade with leverage correctly, you risk losing your deposit very quickly. Statistics confirm this — the majority of retail traders lose money within the first few months.

How to Make Money on the Forex Market?

It is necessary to adhere to several basic recommendations:

• Choose a broker carefully.
• Choose the leverage.
• Follow the chosen strategy and principles of the trading system.