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| Forex Market Currency Trading. |
Forex is an international financial market for currency exchange.
Forex (short for Foreign Exchange) is an international financial market where currency exchange takes place. It was established in 1976 when all countries abandoned the gold standard and shifted to the Jamaican system, where currency rates are determined by the market rather than the government.
Forex has become essential for the normal functioning of the global economy and the exchange of capital between different countries.
Sometimes traders refer to Forex as a currency exchange. However, Forex is not an actual exchange but an international over-the-counter market. It is not tied to a specific trading location since it is a virtual market where participants can trade currencies from anywhere in the world. Another difference from the stock exchange is the relatively small amount of capital required for trading.
How is forex trading conducted?
Trading on the Forex market, or forex trading, is carried out with currency pairs, where one currency acts as a commodity and the other as the means of payment for that commodity. The most common currency pair is the euro/dollar, or EUR/USD. This means that euros are bought and sold for dollars. It is important to understand that trading on Forex involves significant amounts of money, usually equivalent to $100,000. Therefore, for an ordinary person to enter the Forex market, they need a dealer or broker who provides the trader with so-called leverage, which is additional funds for trading transactions.
For example, for every $1, the trader can execute an operation of $50. In this case, the leverage will be 1:50. This method of trading in the Forex market is called margin trading.
For many, speculative trading has become a profession that brings high income. Furthermore, trading on the Forex market allows individuals to protect their savings from inflation. With skillful trading on Forex, a trader's profitability can far exceed inflation.
To increase profits, one can use leverage, which means borrowing capital from a Forex dealer while maintaining a minimum amount of funds in the account, known as margin. This allows the trader to open positions with significantly larger volumes as if they had substantial capital. As a result, the trader assumes proportional risks but gains the opportunity to earn substantial income.
Let's assume a trader has a certain starting capital. Assuming that the euro-to-dollar exchange rate will rise, the trader buys €2,000 at a rate of $1.12 per €1. The transaction amount is $2,240.
Let's assume that the euro exchange rate increases to $1.13 per €1. In this case, €2,000 will be worth $2,260. If the trader closes the deal and sells their €2,000, they will earn $20 from the exchange rate difference.
As we can see, the profit is relatively small. However, using leverage of 1:50, the trader can purchase not €2,000 for their $2,240, but €100,000 (=$112,000) at a rate of $1.12 per €1.
And when the euro exchange rate rises to $1.13 per €1, the trader can buy $113,000. By closing the deal and selling the purchased euros, the trader's profit will be $1,000, not $20 as it would be without leverage, which is 50 times more. In this case, the Forex dealer providing the trader with leverage holds a certain amount on the trader's trading account as collateral. This collateral is called margin, which is why this type of trading is called margin trading.
the FOREX Market:
When it comes to the stock market and trading on the exchange, the first thing that comes to mind for many people is Forex. Indeed, the advertising of this type of investment (although these operations can hardly be called such in this market) has permeated many areas of our lives. Successful traders who earn thousands of dollars parallel to their regular jobs or while lying on the beach look at us from subway posters and internet banners. However, things are not that simple here.
The Nature of the FOREX Market:
FOREX is an abbreviation for Foreign Exchange, which means Currency Exchange. The word "Exchange" in English also refers to a stock exchange or any other trading platform where the exchange of assets takes place, such as trading stocks or futures and options contracts. This leads to the first misconception about the nature of this market.
Forex companies persistently refer to trading on currency rates as either exchange trading or investments. In reality, the lion's share of currency exchange occurs in the OVER-THE-COUNTER market between major international banks. It is a relatively "closed club," and it is very difficult to get in. Trading is done in very large amounts. The minimum lot size is one million dollars or euros, and the standard size is five or ten million dollars.
Currency trading primarily serves the export-import operations of bank clients, and secondly, the interests of the proprietary trading and investment departments of international banks that conduct their investment activities worldwide. To become a client of an international bank and start buying and selling currency to profit from currency movements, you need to deposit not just one million dollars.
Trading will most likely be conducted without leverage and based on the bank's quotes, not the free market. And the bank's quotes will be unfavorable to the client. Well, that's natural: the bank also needs to make a profit! Its traders will not work "for free." This leads to the second and most significant misconception of people involved in Forex. They think that their trades are executed on the market through a clever system of "inter-broker relationships." However, that is not the case.
The majority of transactions in the real interbank market are conducted through a limited number of private information-dealing networks (such as well-known companies like Thomson Reuters or Bloomberg), where access is simply ordered from the street. Many networks do not have gateways that would allow external dealing systems to connect to them to route client orders to the market. Entering each client order into such a system is expensive and therefore impractical.
Each transaction made by bank currency dealers through such systems is then processed by the bank's back office, and settlement for the delivered or received traded currency is made on the third banking day. It is naive to believe that orders from domestic forex brokers for 3,000-5,000-10,000 dollars (even up to 100,000) are sent to the real market. No one will execute, confirm, process, or settle such a small transaction. It is simply not profitable.
Thus, it can be stated, and forex brokers know this well, that no transactions they conclude with clients are executed on the exchange or the interbank over-the-counter market. So where are these transactions executed? And who is the counterparty to such transactions?
Where are Forex transactions executed?
Many forex broker managers explain the working scheme to clients approximately as follows:
The risk management system established at the "firm" (registered in the BVI or Cayman Islands) calculates risks very well and sends them to the real over-the-counter market, not all client orders but only their aggregated component exceeding a certain size.
The firm matches the remaining orders with opposite orders received from other clients. In other words, if you have an order for $10,000, it will be executed within the forex broker itself. If it's an order for $100,000, it will be executed by its counterparty, a large international bank that will take the order into its position. However, if you have an order for $1 million, it will be sent "to the exchange" and executed there.
Of course, this does not correspond to reality. Virtually no forex broker ever sends its clients' "trades" to the open market, whether it's a mythical exchange or a partner counterparty, a large international bank, or an over-the-counter market. They know that the conditions of the game are such that the client will eventually lose. Therefore, there is no need to send trades to the market.
So, who becomes the counterparty in these cases? Where to look for a counterparty? There is no need to look far — the forex broker itself is the second party to the trades.
Thus, by entering into an agreement with a forex broker and depositing money, the client will be trading with the forex broker itself. In this case, any loss for the client is a gain for the forex broker, and any gain for the client is a loss for the forex broker. And he is least interested in losing.
The next misconception that forex brokers persistently try to root in the minds of ordinary people is that one can make a good profit from currency quotes' movements if they correctly predict the direction of the exchange rate. But is that the case?
Some advantages of Forex trading:
Forex trading has several advantages, including the following:
Forex - Profiting regardless of market trends.
The ability to trade on Forex in both rising and falling currency values is another advantage of this market. If the stock market experiences a decline and a rising trend turns into a bearish one, it often results in significant losses for stock traders.
On Forex, however, a decrease in the price of one currency does not lead to a market decline but rather signifies an increase relative to another currency. This feature allows traders to profit on Forex regardless of the direction of currency movement. After all, gains can be made both when the exchange rate rises and when it falls.
Forex - Round-the-clock trading opportunity.
Forex operates around the clock due to the presence of major currency trading centers in all time zones. Therefore, you can trade on the currency exchange rate differences at any time convenient for you (except on weekends when trading is not conducted).
The Forex market is not tied to a specific location.
Trading on Forex is conducted over the internet using specialized software installed on your computer or other personal devices. This allows you to trade from anywhere with internet access.
Forex - an intriguing trading process.
Currency trading on the Forex market is an interesting activity that requires you to be constantly aware of all international news and deepen your knowledge of the market.
Is Forex necessary?
In general, yes, Forex is necessary, despite its resemblance to a casino. However, what is needed is real Forex, where real currency exchanges take place. Why? It is needed for conducting export-import operations, for investment and trading activities on a global scale such as carry trade and others, for risk hedging, and currency investments. However, banks that provide services to their clients for conducting conversion operations handle these transactions excellently. They execute them both on the interbank over-the-counter market and currency exchanges
