Hi all. I have someone trying to get me into Forex. I really don’t know anything about it. Can someone tell me if it is worth looking at? Or can you give me the readers digest version of how Forex works? Thanks
Forex. Can someone explain how it works?
- Thread starter maxgroove
- Start date
To make real money you need leverage. When you use leverage it means you can lose substantially if wrong...
Trading FX requires understanding the macro and economics behind it... most people rely on the voodoo of the charts..
For example the Canadian dollar. You have to name against which currency, for example USD.
When commodities are not doing well, example Oil, CAD will weaken against USD. Canada is a commodity producer...weak commodities means less revenues less taxes ie the economy weakening leading to lower interest rates...
That‘s not the only reason...interest rate differential play a role... example if it is expected to see the US rate go up while staying put in Canada you will see the CAD weaken... capital moves where rates are better. In this case sell your CAD to buy USD...
you get more bang for your money saved in USD then in CAD...it is simplified but I hope it helps...
Trading FX requires understanding the macro and economics behind it... most people rely on the voodoo of the charts..
For example the Canadian dollar. You have to name against which currency, for example USD.
When commodities are not doing well, example Oil, CAD will weaken against USD. Canada is a commodity producer...weak commodities means less revenues less taxes ie the economy weakening leading to lower interest rates...
That‘s not the only reason...interest rate differential play a role... example if it is expected to see the US rate go up while staying put in Canada you will see the CAD weaken... capital moves where rates are better. In this case sell your CAD to buy USD...
you get more bang for your money saved in USD then in CAD...it is simplified but I hope it helps...
Understanding economics won't make you money in trading, just ask any economic or finance professor in University. If they could make money in trading why would they be working for average salary? Trading forex is purely luck based. Sure chart analysis helps risk management but won't make you insanely rich
Id say stay away. Unless you already trade stocks and are consistently good at it. It takes alot of knowledge and alot of luck to be profitable. And get ready to lose alot of money starting out.
If you did it tell us how it went. Predicting currencies requires that you can predict almost every other financial product at the same time. And trading forex successfully as an individual I think is a 0 sum game over time. Most currency exchange is for hedging purposes and theoretically someone should be getting paid to take the risk, but there is enough volume of business that the efficiency of matching offsetting positions means there is very little profit left in between.
The Big Banks that make money from Forex trading really make money from running orders for their clients. This is especially true over the last ten years as the Forex market has become more transparent.
One of my favorite adages is that a financial prognasticator can tell you a market (currency in this case) will move, but they should never tell you when. This has never been more true with the currency market. Many have held positions waiting for the logical devaluation/revaluation in a currency pair only to be waiting for years.
As Mencken mentioned, hedging is an important aspect of the currency market. Perhaps you want to participate in the Japanese stock market, but you don't want your money exposed to the currency risk on the return trip. Some international investors might want to take on the currency risk (upside and downside).
Depending on the platform on which you want to trade, there are various strategies, indicators that make it easier for you to make a decision. The meaning of these transactions is to predict the price between the pairs. EUR / USD are called pairs, but also the rest. In the end, the more accurate the forecast, the higher the amount of income.
Avoid it! Unless you enjoy placing losing bets.
1. forex trading is unlisted derivatives trading, they are CFD (contract for difference). Popular in Asia (but so is compulsive gambling)
2. You aren’t buying and selling the actual currency, just betting on which way it will move.
3.you will lose money. 99% of people who try it lose money. No one does it long, they all go bust eventually. The business model is dependent on constantly adding new clients, but there is zero client asset appreciation. Constant client turn over
4. the company that sells the forex contract takes the other side (they hedge their side) so when you lose, they make money. Just like a casino
5. your “friend” probably is getting something to bringing new clients in the door
6. (For anyone who likes it) the contracts expire daily and have a automatic rollover set up (think auto renew porn subscriptions), which is done with a cost of carry charge. If you must, don’t hold your contracts past 4pm. No overnight dates, bang and go only.
1. forex trading is unlisted derivatives trading, they are CFD (contract for difference). Popular in Asia (but so is compulsive gambling)
2. You aren’t buying and selling the actual currency, just betting on which way it will move.
3.you will lose money. 99% of people who try it lose money. No one does it long, they all go bust eventually. The business model is dependent on constantly adding new clients, but there is zero client asset appreciation. Constant client turn over
4. the company that sells the forex contract takes the other side (they hedge their side) so when you lose, they make money. Just like a casino
5. your “friend” probably is getting something to bringing new clients in the door
6. (For anyone who likes it) the contracts expire daily and have a automatic rollover set up (think auto renew porn subscriptions), which is done with a cost of carry charge. If you must, don’t hold your contracts past 4pm. No overnight dates, bang and go only.
The best way to think about it: Forex is just currency exchange. It is a zero-sum game. If someone wins, someone has to lose as the average win across all players is, by design, zero. Now, ask yourself a question: are you smarter (and, more importantly, can do a more comprehensive analysis) then the "weighted average" guy on the market (where "weights" are equal to the amount he can play with)
Actually, currency trading may be the one place where speculators on average win even though the underlying asset does not produce any real value (like stocks do). The reason is that one of the major player, the central bank, has its own policy and is willing to take a loss, so, the other participants, on average, win. It is especially true for countries where central banks actively participate in the Forex market, but can also apply to developed countries since central banks affect exchange rates through their policy. Word of caution: you should know some information about the central bank moves that is not available to the public, so, if you are not George Soros, stay away from Forex 
