Tuesday, August 30, 2016

What is online forex trading and how does it work? (Part1 of 2)


What is forex?

The word forex is coined from the two words Foreign and Exchange or alternatively foreign currency exchange. It is a system of interchanging currencies one for the other. Take for example
Change of currencies for:

  • International travels and tourism
  • International Schooling
  • Foreign trade and Imports
  • e.t.c

What you would realize is that either directly or indirectly everyone is affected by forex. From governments, banks,  large and small financial institutions, bureau de’ changes, multinational corporations, money transfer exchanges, forex brokerages, the retail forex trader. Our definition of a forex trader would be restricted to the retail trader (forex speculator) who aims to make profit from the fluctuations in the exchange rate. The item of trade here is money.

History of the foreign exchange market

At a certain gathering known as the Bretton Woods Agreement conference in the year 1944, an agreement was reached to allow currencies be freely bought and sold at perceived acceptable values between parties. The United States Dollar (USD) was set as the currency of reference (‘twould have been the Great Britain Pound - GBP - but Germany’s counterfeiting operations had reduced the trust in the British currency as a way of weakening the economy during WWII) and the US economy was most stable among the world powers after the war. This agreement set the stage for online forex trading.

The structure and how forex trading works

-          Interbank Network – Forex brokers – Retail Trader
Envision a normal trade structure of commodities which looks like below
-         Manufacturer   Wholesaler  – Retailer - Consumer

With forex everyone is a buyer and seller of money. So all are traders (with varying levels of financial strength). Forex brokers act as intermediary between you the retail trader/speculator and large volume Liquidity Providers to get you access to the interbank rates providing you the volume of money you wish to buy or sell at any given time and charge you a little commission for each transaction. 

continued in part 2 of 2

Profitability of Forex
For retail traders where does the money we make come from?
How much can be made as daily profit from the forex market?
With risks involved, is forex for me?
What do I need to get started in trading forex?

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