What is Forex
Forex from the English. FOReign EXchange – “foreign exchange”. This is an international currency exchange market.
The price of any national currency is determined by the market, that is, it depends on the supply and demand for this currency. Of course, the Central banks of the respective states play an important role in determining the rates of national currencies. They can influence the market rate of the national currency, putting large sums of money into the trade, because the monetary reserves of the Central Banks are really huge, but even the Central Banks cannot form the market exchange rate of the national currency for a long time. The market takes its toll. And often, even the central banks of the largest states in the world cannot do anything about it.
Thus, the main participants in the Forex market are the national central banks. But these are far from the only participants. There are also state and commercial banks, brokers, dealers, insurance funds, pension funds, as well as large private traders and transatlantic corporations in the Forex market. On fluctuations in the rates of various national currencies you can make good money.
No financial institution, be it a bank, an insurance company or a pension fund, will ever give up excess income.
In addition, the main financial rule: “Money must spin in order to bring other, even more money,” no one has yet canceled.
In 1971, US President Richard Nixon abandoned the “Gold Standard” of the currency, according to which the state’s cash reserves should be secured by the country’s gold and foreign exchange reserves and sent the dollar free float. This served as the emergence of the Forex market and the beginning of free trade in national currencies.
Although the Forex market itself appeared only in 1977. Importers and exporters need the national currencies of other countries to buy or sell goods outside their own country. To do this, through their banks they are forced to buy the currencies of other states. But banks need to take these currencies themselves somewhere in order to resell them later. And foreign currencies can be borrowed in the Forex market.
It is for this reason that all large banks are independently participants in the Forex market and buy as much currency as their clients need – organizations – exporters and importers. Small banks are forced to buy currency from larger banks.
Only large investment players are allowed directly to the Forex market, all the rest act through intermediaries. Accordingly, each of the intermediaries has its own interest. For a currency to be convertible, that is, to have a market value, it must be represented on the Forex market.
Thus, the Forex market presents the currencies of all states that conduct free market trade with other countries.
Types of Forex Market Participants
Central banks play an important role in the Forex market, as they have large cash reserves of their national (and not only) currency.
Throwing large sums of money into the market – monetary intervention, Central banks can regulate the exchange rate of a particular currency. The state can not influence the work of Forex, as it is a free marketplace, legislatively, but the Central Banks of the states through financial and monetary mechanisms and market relations can carry out this or that monetary policy on Forex. And the more money the Central Bank has, the higher its power.
Banks (state, commercial, investment)
Banks are served by importing and exporting enterprises that simply need foreign currency to fulfill their contracts, so for their customers they buy the right currency in the right amount. But not only for this purpose, banks participate in forex trading. Forex is a great way to make money on fluctuations in exchange rates and financial institutions cannot refuse such earnings. Also, financial institutions buy foreign currencies for investment purposes.
Brokers and Dealers
These are special organizations that provide traders with access to the Forex market. The fact is that only large participants can participate in the Forex market. Brokers and dealers are created in order to unite small participants and their capitals within a single platform and provide them with direct access to the Forex market. Although not all brokers give direct access to the market. Small brokers work through larger brokers. Thus, the number of intermediaries in the chain increases.
Pension funds, insurance companies
Money on the balance sheets of pension funds and insurance companies must spin in order to bring even greater profits. Therefore, large pension funds and insurance companies are regular participants in the Forex market. Also, pension funds and insurance companies buy the currencies of other states for investment and savings purposes.
If the company is large and its units are located in different states, then such a company constantly needs the currencies of different states to work. In this case, it is better for the company to directly enter the Forex market in order to bypass intermediaries in the form of banks.
Why do you need Forex
Forex is necessary for the currencies of different countries to be freely exchanged between different market participants and different states.
Thanks to Forex, the market price of a particular national currency is determined. Central banks of various states can resist and introduce “monetary interventions” to stabilize national currencies, but for a long time they will not be able to resist.
The market will put everything in its place and show the true value of a particular national currency. After in many states after the United States the national currency ceased to be tied to the country’s gold and foreign exchange reserves, Forex became simply necessary. It shows and determines the market value of a particular national currency.
Forex is an important global organism in regulating the prices of national currencies around the world.
When there is no binding of the value of national currencies to gold, Forex remains the only global mechanism that determines the true price of a particular national currency. If the national currency is needed, they buy it. It is not for nothing that all world states strive to conclude international contracts in national currency, and not in US dollars. By concluding an international contract in US dollars, foreign countries strengthen the economy of the United States, and not their country, making the dollar even stronger.
In the Russian language, the concept of Forex is associated exclusively with speculative trading, however, in the world it is a much broader concept. Forex is multifaceted and speculative trading is only one of its parts. The fact is that only the largest participants are allowed on the Forex market. To enter the Forex market, stock brokers and dealers are forced to either merge with the same brokers and dealers, or it is much easier to work through those brokers and dealers who have access to the Forex market or simply through larger brokers, which in turn also work Through a broker. A chain of traders – Forex can be several brokers, each of which receives its commission from the activities of the trader.
Thus, even if the trader has a profit, it is very insignificant, as it is skillfully distributed through a huge number of intermediaries.
In order to increase the profit of traders, and for one and their own profit, Forex brokers and dealers offer leverage, which significantly accelerates cash flow, and therefore increases profit if the transaction was profitable. If a trader is at a loss, then due to leverage, his losses will only increase. Therefore, leveraged trading is very risky.
Can I make money on Forex
To attract more traders, small Forex brokers offer more leverage to their traders in order to increase the turnover of funds, and therefore profit.
Naturally often, they make at the expense of the capabilities of a larger Forex broker. And if in the Forex trader chain there are many intermediaries in the form of brokers and dealers, then even one of them scam in the chain can lead to the loss of all trader funds.
Therefore, if you want to make money on Forex, you need to work only with large and trusted Forex brokers who have been working in the market for more than a year and have a stable and reliable reputation.
At the same time, one should not forget that Forex trading has its risks. Of course, national currencies are not as unstable as highs, however, they also sometimes fall.
To successfully trade Forex, you need to understand the principles of market movement, follow the news, be able to analyze graphs of exchange rates, have strong nerves and learn to wait and make informed decisions, not impulsive ones.