Learn All About Forex Business

What Is Forex Business?

Forex business involves selling/buying of different currencies. People invest money in banks, stock market etc, forex business is just like that.Different currencies rate go up and down. We need to do some market analysis to determine which currency in best to invest money in. In forex business, we give one currency to buy another one.

What factors influence currency rates?

Political situation

Economic situation

Supply and demand

Rumors And etc.

There are many factors that can cause a change in a currency rates.

How to do forex business?

First of all, you will have to get an online forex account. Now, before you trade any currencies, remember that, many new comers in this business lose lot of money and they learn this business the hard way. You should not trade until you have done lot of research about the currency you want to buy.

One political statement can have a big impact on a particular currency. You have to be aware of political events: look at the economy and other things that can influence currency rates. You can either buy or sell a currency. If you buy a currency, then you will get profit if this currency rate increases and if you sell [go short] a currency, then you will gain profit if the rate goes down.

We all know that political scenarios and economic situations can change very quickly. One bankruptcy announcement from a major company can have a big influence. You can never be sure that the trade you are doing will give you profits in the end.

Have I done any forex business myself?

Yes, I have done this business a little bit myself. But I did not traded currencies online: instead, I have done the trades at a foreign exchange companies.

What I traded?

I had few thousand Pounds which I traded with Pakistani Rupees when the rate was:

1 British Pound = 118 Pakistani Rupees

After few days, I saw the Pound rate down at about Rs.113. At this level, I thought maybe I should invest my money back in Pounds. There was no guarantee that the rate of pound will go up again. The rate could go further down or could go up again. So I decided to do this investment and was willing to take this risk. After few weeks, the rate of pound reached approximately Rs.118 again. That is when I again traded pound with Pak rupee.

I am currently monitoring the market and I think I will invest my money in the currency which will be weaker against US dollar. And when/if that currency gets stronger against US Dollar, I will trade that currency to get some profit. But it is very much possible that the currency I buy will get further weaker against US Dollar instead of getting stronger. And if I will need my money for some reason, then I will have to trade it and will lose money instead of gaining any profit.

If you want to make money with forex business, then it is possible if you are willing to properly understand all the factors involved in this business and also understand that this work is extremely risky. Do not invest money until you have done proper and thorough market analysis. I have seen some online companies that offer a free forex practice account. You can join such program in order to see if you really can do this business or not.

You will be able to trade in forex, 24 hours a day and 5 days a week.

Structure of the Forex Market

The forex is unique among financial markets in a number of ways. One of these is that it was not traditionally used as an investment vehicle. It had, and still maintains to some extent, a somewhat more utilitarian purpose. In today’s globalized economy, most businesses have some international exposure, creating the need to exchange one currency for another in order to complete transactions. For example, Honda builds its cars in Japan and exports them to the United States, where an eager American buyer exchanges his dollars for a brand new Honda. Some of this money has to make its way back to Japan to pay the factory workers that built the car, but first those dollars have to be exchanged for Japanese yen, since that is the currency the Japanese factory workers are paid in. Transactions such as this are facilitated by international banks and are done through a mechanism known as the foreign exchange market, or forex. Since banks are used to facilitate these cross-border transactions, they naturally want to be paid for their services. This payment comes in the form of a bid/ask spread – offering to buy the desired currency at a slightly lower price than they are willing to sell it at, and pocketing the difference. Considering the fact that more than $3bn moves through the forex market daily, these seemingly small fees can add up to a significant sum.

Since the 1970’s most of the world’s major currencies have been on a (mostly) free-floating exchange mechanism, allowing for exchange rates to be determined by market forces, that is, supply and demand. I say “mostly” because there have been times when major central banks have intervened in the market to manipulate exchange rates by either buying or selling large amounts of their currency, but normally this only takes place in extreme situations. There are also other central banks that choose to manage their currencies much more strictly, but these are a minority in the developed world. So in most cases, this free-floating exchange rate mechanism allowed currencies to fluctuate against one another much more, and this in turn opened the door to speculation on the future movement of exchange rates. The banks’ intimate knowledge of the forex market, and their high level of capitalization allowed them to be the first to speculate in the forex market, and to significantly increase their profits by doing so. An unfortunate consequence of this speculation however was that liquidity at certain times became scarce, and some necessary transactions could not be completed. In order to solve this problem, banks turned to expanding the number of participants in the market to include non-banks, thereby generating sufficient order flow (liquidity distribution) to complete clients’ transactions, and also to profit from these newer and less knowledgeable market participants. These less experienced forex market participants first included large funds (such as the legendary Quantum Fund), but nowadays also include your local retail forex dealer.

Another unique feature of the forex market is that it is an over-the-counter (OTC) market, meaning that there is no central exchange (like a stock exchange) where transactions take place. Instead, top-tier transactions are made in the “interbank market”, which is a collection of the world’s largest money center banks, all free to trade currencies amongst each other at whatever rate they can agree on. Of course, it may be difficult to find your way around such a maze, so the brilliant minds at the leading banks developed the Electronic Broking System (EBS) to enable participants to easily see at what rates all the other participants are willing to deal at. A competing system was also developed by Reuters (D2). Today, one is preferred over the other mostly on the basis of which currency pair you want to trade, with EBS used mostly for EUR/USD, USD/JPY, EUR/JPY, USD/CHF and EUR/CHF, and Reuters D2 used for all other currency pairs. In 2006, EBS was acquired by ICAP. It should be noted that while these services provide a centralized structure for pricing information, they DO NOT constitute a centralized exchange. The forex is still very much an OTC market.

The 2nd tier of the market is made up of smaller bits of larger multinational institutions. This is when, for example, a bank branch in the US deals with another branch of the same bank in, say, Japan. So when you walk into your local branch and want to exchange currency, they will give you a quote which is not exactly representative of the interbank exchange rate. You are free to shop around for a better quote, and you would often be wise to do so, as rates can vary significantly from one bank to another.

Most retail forex brokers are a part of the 3rd tier, as they often deal with only a single 2nd tier liquidity provider. This is not always the case, as some retail brokers offer direct access to multiple liquidity providers, and are therefore themselves a part of the 2nd tier. This is particularly true of Electronic Communication Networks (ECNs), who normally route retail traders’ orders directly to the interbank market.