Forex or foreign exchange market is the largest financial market in the world – larger even than the stock market, with a daily volume of over $5 trillion. Imagine if you could get a tiny slice of that market, that would equal millions if not billions of dollars. Forex market is as old as money itself, maybe not in the form we know it today but it did. Under almost every video we upload, there are at least a few comments about people claiming that they have made a fortune trading in the foreign exchange market, usually, they are directly recognized as spams, but sometimes they do get published. Here in this video, we will find out if you really can make money trading in the forex market?
But to figure that out, we have to understand a few key concepts first? What is the forex market, and how exactly does it works? What the three main ways traders use to make money? And finally, why most people end up getting scammed? 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 check out our Patreon page.
In fact, I will be posting weekly updates about the market or sometimes I will pick up a company and analyze it and figure out if its a good investment or not. So if you are interested in all of that, then make sure you check out our Patreon page. Â And now let’s get into it! 2. Forex For dummies When we talk about globalization, we mention things such as tourism, international fights, shipping, but we often ignore the role of financial institutions in making that happen.
In fact, without Forex, international trade is impossible. Since the existence of money, every country had its own currency, even when gold was the currency of the world. Not all gold coins were equal; some were made out of quality gold. Others were mixed with other kinds of metal. Hence, merchants always had the problem of measuring the value of different currencies.
Fast forward to today, even when we created paper currencies and completely demolished the gold standard, that problem didn’t suddenly vanish. In fact, it became even more complicated since each country created its own currency. Currently, there are 180 currencies all around the world. Let’s say you live in the United States, and since its summer, you decide to visit your northern neighbor – Canada. You can’t simply use your US dollars there, you have to buy Canadian dollars, and only with them, you can pay for goods and services in Canada.
If let’s say hypothetically one US dollar is equal to 1 Canadian dollar, using hundred dollars, you will buy 100 Canadian dollars. But if you look at the real world, 1 US dollar is equal to 1.36 Canadian dollars which means using 100 USD dollars, you can buy 136 Canadian dollars. Apple can’t simply hire Chinese workers and pay them in dollars to manufacture your iPhone. They can only pay them in Chinese yuan, that’s why they have to buy yuans first.
And if they need to buy LCD screens for their latest flagship from Samsung, they have to purchase south Korean won to pay for these screens. And guess where all of these currency transactions take place. Exactly, the foreign exchange market or Forex in short. 3 . Can you really make money by trading money?
The year 1996 saw the first generation of forex online trading platforms. The Internet made forex trading so accessible that it became mainstream, exactly like the Internet made it easy to invest in the stock market.
There are essentially three ways to profit in the forex market. The most popular is probably “the spot market”, it’s just a fancy word for a transaction with immediate delivery such when you buy gold, for example, you don’t wait to receive it some time in the future like future contracts but rather own it immediately, but in this case, we are talking about currencies. Currencies fluctuate all the time, and if you end up guessing right when a certain currency rises in value as you do with stocks, you make a profit.
At the end of the day, the currency is like any other commodity that’s driven by demand and supply. Let’s say for the sake of example, one US dollar equals to 2 Chinese Yuan, if demand for Chinese Yuan rises or in other words, if more people decide to buy the Chinese Yuan because, I don’t know, they have set up factories in China, now they have to pay their employees. The value of the Chinese Yuan will increase, so 1 US dollar will no longer be equal to 2 Yuan but rather to 1.5 yuan. Of course it’s an extreme oversimplification, but that’s how it works in short.
The number of factors that can influence the demand for a certain currency are so many that we can’t cover all even if this video is going to be an hour long, so lets take a look at a few important ones. The economic performance or the political situation can influence the demand for a certain currency or the perception about the future of the economy.
In June 2014, a single British pound equaled to 1.7 US dollars but then rumours spread that UK might leave the EU. That scared off a lot of investors, so they pulled out their investments, and the demand for British pound slowly began to fall.
Today with one British pound, you can buy 1.25 US dollars. Or take an example of China. For the last 20 years, the Chinese economy was growing at an unbelievable rate; more and more business shifted their manufacturing to China. As a result of that, the Chinese yuan kept rising in value against other currencies such as the US dollar.
Traders in the forex analyze the market and speculate about the future of a particular currency. If they expect it to rise, they buy a lot of it, hold it till the price rises and then sell it, exactly as you trade stocks. But what makes this market much more lucrative is that brokers often provide to their clients unbelievable leverage. Leverage ratios 1:100 are very common in the forex market. That means that, if you trade using your thousand dollars, you can hold a position worth a hundred thousand dollars.
If you end up making a small percentage in profit, it will be huge. On the other side, there are futures and forward contracts. They aren’t really common among the traders. They are more often used by multi-national corporations. Let’s say company A that’s based in the USA wants to sell t-shirts in the United States.
Say the t-shirt costs 10 Mexican pesos to produce in Mexico and company A wants to sell it for 15 dollars. And lets say hypothetically one US dollar equals to 1 Mexican peso. In this case, company A should make 5 dollars in profit for each t-shirt sold. But what if by the time the Mexican firm manufactures all the t-shirts and delivers them to company A, the Mexican peso rises in value where lets say 1 Peso equals to 2 US dollars. So a single t-shirt would cost now 20 dollars and company A will make a loss if it sells them at 15 dollars each.
To prevent such things from happening or any other risk of price fluctuations, companies often buy futures contracts to fix the rate at which the transaction will be completed.
And if you want to buy cool t-shirts where you don’t have to deal with any kind of price fluctuations, you can visit our store. Finally, we have launched our merch—T-shirts, hoodies, phone cases with beautiful designs that you will definitely love. So make sure you check out our store. And did I tell you that you will be supporting our channel to make more similar videos?
The link will be in the description. 4. The problem with forex trading – Forex – the market for losers Unlike the stock market, where you can analyse a certain company. Figure out if it’s undervalued or overvalued and make a rational decision that at least in the long run will payback. Forex is different, its more like speculation.
There are simply too many factors that influence a certain currency from tourism to geopolitical risks, which makes the market even more volatile. In fact, the major players are the banks that trade among each other in huge volumes that could easily crush you no matter how big is your capital.
So its common for amateurs to easily lose their position when they aren’t well educated about the market. They can get emotional and make a wrong move. In some countries, the forex market is entirely unregulated, which makes it even riskier.
A lot of brokers aren’t trustworthy and can mislead their customers by betting against them, for example. Remember the unbelievable leverage you can get in the forex market we talked about earlier. Well, there is a downside to it. Many brokerage firms went bankrupt due to lousy leverage decisions. So if your position loses value to a point where you no longer meet minimum margin requirements, your broker will liquidate assets to help assure that you don’t lose more money than you put into the account.
Beginner traders who are new to the game often make this mistake and quickly lose their capital. It’s not to say that anyone who trades in Forex loses, but risks are extremely high. If you guys have enjoyed this video, make sure to give it a thumbs up. And if you want to see more similar videos, then hit that subscribe button and the bell besides it and don’t forget to checkout our Patreon page to support us to make more similar videos.
Thanks for watching and until next time.
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