What is Forex: a scam or an opportunity to make very good money?
Good day, dear readers!
We have all heard about the huge opportunities to get rich by taking part in the stock exchange game in Forex, but for most of us this topic remains hidden under some kind of dark veil.
Today I will make a desperate attempt to cast the first ray of light and answer the "super difficult" questions: what is Forex, how it works and how to make money on it. I will also lead you to understand one very important secret that always ensures the safety of 90% (!) Of trading capital.
How Forex traders make money
If you want, we will take an even more risky step together: we will try to master the terminology of the exchange, learn to understand economic news and even open deals on the market. But this is all - in future articles, today's goal is solely an acquaintance with Forex.
At the end of the article, I will express my opinion about whether Forex is simply a scam and a scam for inexperienced Internet users.
How Forex traders make money
What does your imagination draw when you hear the word "market"? Surely this is a large crowd of people, counters, all kinds of exclamations and the like. In order not to get confused in all this and to clarify, economists divided the financial market into several components.
The first component (which is also the most ancient) is the raw materials market. It would not be a mistake to call it "commodity". Here, in addition to oil, coal, gas and other utilities, cotton, sugar, grain crops, timber and many other things are quoted.
Since these goods are bought and sold, supply and demand act on them, therefore, the price is constantly changing, and its rate is displayed on the charts. For example, below is a graph of changes in gasoline prices.
The second component, which appeared much later, is securities. There were so many of them that they had to give a serious scientific name to the market segment responsible for them - the stock market.
So, in simple terms, the stock market is the stock market.
The functioning of the financial market is not possible without the presence of one very important connecting substance, the means of making payment - money. Money, like raw materials and securities, has its own value, so it either grows in price or falls. The part responsible for them was named the foreign exchange market or Forex.
We have figured out what Forex is, but not quite yet.
The world foreign exchange market, stock and commodity exchanges make up a single whole, but they function a little differently. Moreover, Forex stands apart from the rest. Let's speculate on how it works and characterize a number of its features, because without knowing them, it is impossible to move on to real trading.
Features of the Forex market: attractive and not so
As a historical reference, we note that the first exchanges appeared about 700 years ago, since then they have been constantly developing and improving until they reached the current level. Professional traders often call the exchange synonymous in their speeches: pit, platform, pit, floor, and so on.
The main difference between Forex and other components of the market has already been discussed by us: it is currency trading, not securities or raw materials. But if the value of a share, a barrel of oil, a kilogram of sugar can be expressed in the currency of a particular state, then in what way can the currency itself be expressed? More on this below.
Trade both on the ups and downs of the market
Trying to value money in terms of the goods it can buy is too problematic. However, the term "purchasing power of money" still exists, and we will talk about it in articles devoted to fundamental analysis. The simplest option, which talented economists have taken advantage of, is to express the value of one currency in another.
Add a new word to your mental vocabulary:
The exchange rate is its value expressed in the currency of another country.
For example, the dollar against the ruble costs (at the time of this writing) 59.25, the euro against the ruble is 63.16.
If the value of one currency is expressed through the value of another, then with the growth of one currency, the other will fall and vice versa. This seemingly simple position leads us to the key difference between Forex and other market segments:
In Forex, you can make money both on a rise in price and on its fall, because a fall in one currency always means an increase in another.
If we bought sugar at a price of 50 rubles. per kilogram, then we can make money only if we sell it at a higher price and nothing else. In Forex, in order to earn money on the fall of the currency, we simply buy another currency with which the original is in a pair.
The extraordinary popularity of Forex is due in part to the fact that it is possible to trade here using leverage. We will talk in more detail about this remarkable feature in a separate article, where we will understand everything in detail.
For now, you need to understand that leverage allows you to open a deal several times larger than the trader has. For example, if we have 6,000 rubles, and a dollar costs 60 rubles, then without leverage, we can purchase only 100 units of American currency. If there is leverage, for example 1: 100, we are given the opportunity to open a deal with a volume 100 times larger than the initial one, to buy not $ 100, but $ 10,000.
Remember that leverage will not lead you into any debts to a broker, no one will hang on you "credit". Why this is so and where did the mentioned fabulous prospects come from, I will talk in the article about leverage and lot .
In the stock and commodity markets, when opening and closing each transaction, a certain commission is charged, for example, 0.03% of its volume. Commission is the broker's earnings, without which trading would be impossible.
Broker is a company that executes a trader's trade orders (buys and sells shares, raw materials, currency at fixed prices).
There are brokers on Forex too, but they profit not from commissions, but from spreads. A spread is a certain amount of money that needs to be paid only once at the time of opening a trade.
Let's calculate: 59.585 - 59.085 = 0.5 rubles. We will have to pay fifty kopecks to the broker to get the right to open a deal.
Spreads have their advantages, but there are also disadvantages: when they are too large, it is not possible to trade short-term or scalp (but more on that later). Of course, such huge amounts are far from being in all currencies.
Most traders open deals with "major" currency pairs, where the spreads are tiny. An example is the EUR / USD pair (euro / dollar).
Let's calculate: 1.0661 - 1.0659 = 0.0002 dollars will be the broker's earnings from one deal opened by us. In rubles, we will spend (if dollar = 59.25 rubles) 0.01185.
Since the spread is charged immediately upon opening a trade, we will always observe a negative value in the "Trade" tab of our terminal. For clarity, let's open a deal on the AUD / USD pair (Australian dollar / US dollar) on a demo account and look at the control menu.
Forex - cheating or not?
Surely you have already been interested in this issue on the Internet, right? If yes, then you must have come across information about fraudulent brokers, fictitious quotes shown by terminals, instantly evaporating investments in PAMM accounts, and so on.
Another interesting option that I have observed in many reviews: “I just opened a deal, and the price immediately went back, I was carried away by the stop, and the rise began again!”. One gets the impression that brokers are really doing nothing but stealing from newbie traders - innocent sheep.
In fact: according to statistics, 80% of all novice stock speculators drain all their money in the first year of trading. Hence the mass of negative reviews on the websites of brokerage firms. But the question arises: is the market to blame for this? Professionals, oddly enough, earn stable income.