What is Forex? How to start trading and making money on the currency exchange?

Forex (derived from Foreign Exchange) is an international currency market, which is also the largest and most active in the world. Its main participants are central banks, large international companies and ordinary banks. Ordinary investors can also enter forex to make money. However, to do this, they will need intermediaries, a large amount or loan, as well as basic knowledge of how this market works.

Forex trading is like exchanging currency while traveling abroad: a trader buys one currency and sells another, and the exchange rate constantly fluctuates depending on supply and demand. But unlike traditional currency exchange offices, this happens exclusively on the Internet, and when buying, the trader does not receive real currency, but only makes transactions on price changes. Simply put, in forex, traders buy a currency at a certain rate in order to subsequently sell it at a higher rate and make money on the difference in currencies (spread).

Major Forex Trading Participants
In the international currency markets, transactions are most often made by the following participants.

1. Central banks. Regulators trade on Forex, intervening to stabilize the exchange rate of their national currencies. This is necessary to prevent the risks of economic crises, as well as to maintain the balance of imports and exports.

2. Large companies, investment and pension funds, importers and exporters selling foreign currency through banks or independently. Organizations buy and sell foreign currency to exchange revenue received from international business for domestic currency or, conversely, to pay for contracts abroad. They provide a steady demand for foreign exchange (importers) and the supply of foreign currency (exporters).

3. Banks make money on the difference in the price of buying and selling currency on Forex. The main function of banks' participation in forex trading is to ensure the liquidity of their own funds and the execution of client orders (for example, those of importers and exporters).

These players make large trades that can lead to a significant change in the price of the currency. As of April 2022, Citi Bank, JP Morgan, UBS, Barclays Bank, Deutsche Bank, BAML, Goldman Sachs, HSBC, and Morgan Stanley had the greatest impact on the market among commercial banks. Among the central banks, these are the central bank of the United States, the Federal Reserve System (Fed), the central bank of Germany, the Bundesbank, and the United Kingdom, the Bank of England.

How to Start Forex Trading
You can start trading on Forex by studying which currencies are most often traded with.

The Most Popular Currencies in Forex

The top 6 currency pairs in 2023 include:

1. EUR/USD — EUR/USD
   2. USD/JPY – Dollar/Japanese Yen
   3. GBP/USD – British pound/dollar
   4. AUD/USD – Australian Dollar/Dollar
   5. USD/CAD – Dollar/Canadian Dollar
   6. USD/CHF – Dollar/Swiss Franc

Each currency pair represents the current exchange rate for the two currencies. The currency on the left is called the base currency, and the currency on the right is called the quote currency. The exchange rate shows how much of the quote currency is needed to buy 1 unit of the base currency.

For example, if the EUR/USD exchange rate is 1.2, it means that 1 euro can buy 1.2 dollars
When the exchange rate rises, it means that the base currency has increased in value relative to the quoted currency (therefore, in the EUR/USD pair, 1 euro can buy more dollars). And, conversely, if the exchange rate falls, the base currency has decreased in price.

The forex market is quite volatile, but professional traders are able to predict at what point the price of a currency will change. Among the main factors that can affect price movements are:

1) current interest rates;
2) economic indicators;
3) geopolitical sentiments;
4) price speculation.

How to make money on Forex as a private investor?
In addition to large players with large sums of money, an investor with a small personal capital can also trade on Forex.

1. Who Helps an Ordinary Investor Enter the Market

A non-professional trader can start trading on Forex with the help of a Forex dealer – a specialized company that acts as a counterparty to the transaction. The investor bets on the movement of exchange rates and concludes an appropriate transaction with the dealer. If his prediction comes true, he earns and the dealer pays him the money. Otherwise, the intermediary company writes off a certain amount from his account.

2. How the Deal Is Made

To make transactions on Forex, an investor must open a brokerage account and transfer a deposit to the dealer's account. These funds will be a guarantee that the client will be able to fulfill his obligations under the transactions. Before starting trading, a trader selects a currency pair in one of the existing programs, the price of which he will play on. If the client predicts that the rate of the quoted currency will rise, you can open a trade to "buy" it. If he expects it to fall, he can "sell".

For example, a trader chooses the traditional EUR/USD currency pair (Euro – Quote Currency/Dollar – Base Currency), in which the Euro is worth $1,096, and believes that the Euro/USD exchange rate will rise. Next, the client opens a buy trade, let's say, $100. It is important that after that, euros are not credited to the investor's account, but are only reflected in the internal register of transactions of the forex dealer and on the balance in the program.

3. How to Make Money

Let's say that the exchange rate really increased and amounted to 1.106 dollars per euro. The investor can continue to wait for the rate to rise, or he can complete the transaction. In the second case, he will receive income from the spread in the value of currencies in the amount of $1.

$(1,106 — 1,096) × 100 = $1
The forex dealer will credit the profit to the trader's balance by replenishing the deposit. However, if the forecast does not come true, the money will be debited from the bank account.

In order to earn large sums from the difference in exchange rates, large deposits are needed. If an investor does not have significant personal capital, they can take advantage of what is known as leverage.

Leverage is a loan from a dealer, which is issued against the security of assets purchased or previously purchased by the investor. Leverage is also the ratio of the client's own funds to borrowed funds.
The loan amount can exceed the deposit amount by 10, 20, 100 times or more. One of the main advantages of trading with leverage on forex, as opposed to the stock exchange, is that the dealer does not allow the client to accumulate debt. The maximum risk for a trader in this market is his own deposit.

What are the risks?
Since forex traders often trade with leverage, the "game" in forex comes with additional risks compared to other financial instruments. In the foreign exchange market, prices fluctuate constantly, but in small quantities, so investors have to make large trades to make money. In the event that a trader makes a losing bet on a change in the exchange rate, leverage can only amplify his losses. On average, about 71 percent of retail forex traders lost their money, according to CompareForexBrokers.

Another risk may be working with a licensed dealer who does not execute orders in real time, but with a delay or does not return the deposit at the request of the investor.

In order to avoid losing funds, experts advise novice investors to develop a trading strategy. Although it is not always possible to predict price movements and the point at which a change will occur, having a trading strategy will help an investor develop general principles for further trading. In addition, it is necessary to maintain emotional balance and do not forget to check your positions at the end of the trading day for incompleteness.

However, any trader is also not immune from falling into the hands of a fraudulent intermediary, because of which he can lose all his money, regardless of how successfully his trading strategy was implemented. Therefore, before starting to work with a dealer, it is necessary to check whether he has a license from the Central Bank. You can see it here.

What is the difference between forex and the stock market?
The turnover of the forex market is several times higher than the volume of trading on all national stock markets combined. For example, in 2022, the daily trading volume on forex was $7.5 trillion, while the trading volume on the American stock exchange was $257 billion per day.

In addition to the size of the market, there are a number of other features.

1. Forex is open around the clock from Monday to Friday.
2. This is an over-the-counter market, it does not have a centralized platform for trading — all transactions between traders around the world go through the Internet, and not through a single organization.
3. The foreign exchange market is highly liquid and often makes it easier for investors to enter and exit trades.
4. Forex offers reduced transaction costs as well as higher flexibility compared to the securities market (leverage).
5. Forex currency trading always involves high risk.
6. Market manipulation is less likely in the forex market, when quotes rise or fall, and participants with insider (confidential) information benefit from this.

Forex can be another source of income for investors who understand how the financial market works and are not afraid to take risks. In this market, people can quickly multiply their start-up capital, but it is necessary not to forget about the associated risks.