The currency or forex market is the largest financial market in the world
even larger than the stock market, with a daily volume of over $5 trillion. Imagine if you could get a small slice of that market, that would amount to millions, if not billions of dollars. The forex market is as old as money itself, perhaps not in the way we know it today, but it was. Beneath almost every video we upload there are at least some comments about people claiming to have made a fortune trading the forex market, usually directly identified as spam, but sometimes posted. Here in this video, we are going to find out if you can really make money by trading the forex market. But to find out, we first have to understand some basic concepts.
What is the forex market and how does it work exactly?
What are the three main methods that traders use to make money? And finally, why do most people end up cheating? Hey Proactive Thinkers, if you want to support this channel and help us make more videos and want your name at the end of the next video, make sure to visit our Patreon page. In fact, I will post weekly market updates or sometimes I will choose a company and analyze it and see if it is a good investment. So if you’re interested in all of that, be sure to check out our Patreon page. Now let’s get into it! 2. Forex For Dummies When we talk about globalization, we mention things like tourism, international struggles, and shipping, but we often overlook the role of financial institutions in making this happen. In truth, without Forex, international trade is impossible.
Since the existence of money, each country has had its own currency, even when gold was the currency of the world. Not all gold coins were the same; Some of them are made of high quality gold. Others were mixed with other types of minerals. Therefore, traders have always had the problem of measuring the value of different currencies. Fast forward to the present day, even when we created paper money and completely demolished the gold standard, this problem did not suddenly disappear. In fact, it became more complicated as each country created its own currency.
There are currently 180 currencies around the world. Let’s say you live in the United States, and since the summer you’ve decided to visit your neighbor in the north: Canada. Not only can you use your US dollars there, you have to buy Canadian dollars, and you can only pay for goods and services in Canada with them. Assuming that hypothetically one US dollar equals one Canadian dollar, using one hundred dollars, you would buy 100 Canadian dollars. But if you look at the real world, one US dollar is equal to 1.36 Canadian dollars, which means that with 100 US dollars you can buy 136 Canadian dollars. Apple can’t just hire Chinese workers and pay them dollars to make its iPhone. They can only pay them in CNY, so they have to buy RMB first. And if they need to buy LCD screens for their latest Samsung flagship phones, they have to buy South Korean won to pay for these screens. And guess where all these currency transactions occur. Exactly, the currency market or forex for short.
Can you really make money by exchanging money?
1996 saw the first generation of online forex trading platforms. The Internet has made currency trading so accessible that it has become popular, just as the Internet has made it easy to invest in the stock market. There are three basic ways to make a profit in the forex market. The most common is probably the “spot market”, it’s just a fancy word for a transaction with spot delivery, like when you buy gold, for example, you don’t expect to receive it in the future as a futures contract, but immediately, but in this case, we’re talking about currencies. Currencies fluctuate all the time, and if you end up guessing when a particular currency will rise in value as in stocks, you make a profit. At the end of the day, currency like any other commodity is driven by supply and demand.
Suppose, for example, that one US dollar equals 2 Chinese yuan, if the demand for the Chinese yuan increases, or in other words, if more people decide to buy the Chinese yuan, because, I don’t know, they set up factories. In China, they now have to pay their employees. The value of the Chinese yuan will increase, so that the US dollar is not equal to 2 yuan, but 1.5 yuan. Of course, it’s an oversimplification, but that’s how it works in a nutshell. The number of factors that can influence the demand for a particular currency are Rumors spread that the UK could leave the EU. That scared off many investors, so they withdrew their investments and the demand for sterling began to slowly decline.
Today, with one pound sterling, you can buy 1.25 US dollars. Or take an example from China. Over the past 20 years, the Chinese economy has grown at an incredible rate; more and more companies moved their manufacturing to China. As a result, the Chinese yuan continued to rise in value against other currencies such as the US dollar. Forex traders analyze the market and speculate on the future of a particular currency. If they expect it to go up, they buy a lot, hold it until the price goes up, and then sell it, just like you trade stocks. But what makes this market that much more lucrative is that brokers often provide their clients with incredible leverage.
1: 100 leverage ratios are very common in the forex market. That means if you trade using your thousand dollars, you can hold a position worth one hundred thousand dollars. If you end up making a small percentage of profit, it will be huge. On the other hand, there are forward and futures contracts. They are not really common among traders. They are most used by multinational corporations. Let’s say US-based Company A wants to sell T-shirts in the US Let’s say the shirt costs 10 Mexican pesos to produce in Mexico and Company A wants to sell it for $ 15. And let’s say that, hypothetically, one US dollar equals one Mexican peso. In this case, Company A should make a profit of $ 5 for each T-shirt sold.
But what if by the time the Mexican company makes all of the shirts and delivers them to Company A, the Mexican peso increases in value where, say, 1 Peso equals US $ 2? Therefore, a single T-shirt would now cost $ 20, and Company A will suffer a loss if it sells them for $ 15 each. To prevent such things from happening or any other risk of price fluctuations, companies often buy futures contracts to set the rate at which the transaction will complete. And if you want to buy great t-shirts where you don’t have to deal with any kind of price fluctuation, you can visit our store. Finally, we have launched our merchandising: t-shirts, hoodies, phone cases with beautiful designs that you will definitely love. So be sure to visit our store.
The problem with currency trading – Forex
The losers market as opposed to the stock market, where you can analyze a certain company. Find out if you are undervalued or overvalued and make a rational decision that, in the long run at least, will pay off. Forex is different, it is more like speculation. There are simply too many factors that influence a given currency, from tourism to geopolitical risks, making the market even more volatile. In fact, the main players are banks trading with each other in large volumes that could easily crush you no matter how big your capital is. Therefore, it is common for amateurs to easily lose their position when they are not well informed about the market. They can get excited and make a wrong move.
In some countries, the forex market is not fully regulated, which makes it even riskier. Many brokers are unreliable and can mislead their clients by betting against them, for example. Remember the incredible leverage you can get in the forex market that we talked about earlier. Well, it has a downside. Many brokerage firms went bankrupt due to lousy leverage decisions. So if your position loses value to a point where it no longer meets the minimum margin requirements, your broker will liquidate the assets to help ensure that you don’t lose more money than is coming into the account. Beginning traders who are new to the game often make this mistake and quickly lose their capital. This is not to say that anyone who trades Forex loses, but the risks are extremely high.