What is Forex? This is a huge over-the-counter marketplace where various currencies are exchanged. Its turnover exceeds 5 trillion dollars a day! (For comparison: the turnover of all world stock markets is "just" about 85 billion dollars, that is, almost 60 times less).
Forex was created for international commercial activity, but today there are not only companies conducting such work, but also private traders who have received access to trade, as well as investors whose main purpose is to profit from fluctuating quotations.
In this article, we will look at the history of the emergence and formation of the international currency exchange market, the main participants in this market, as well as the principles of trading.
Is Forex an Exchange or Not?
You can often find on the internet the opinions of traders who say that Forex is an exchange. In fact, this is not the case. An exchange is a separate platform for trading. Forex is an over-the-counter market, that is, there is no common platform for currency exchange transactions.
At its core, the Forex market is a set of market makers (banks) that offer their services to everyone who wants to exchange certain currencies. Some banks are merging into larger aggregators to increase liquidity. Subsequently, all those who want to participate in trades connect to market makers and gain access to their Depth of Market (table of orders for buying and selling currencies).
Forex Market History
We owe the emergence of the modern international currency market to the 37th President of the United States, Richard Nixon. It was he who abolished the gold standard and the possibility of converting American currency into gold.
The Bretton Woods Agreement was signed In 1944, which set the dollar standard. The American currency, in turn, turned out to be pegged to gold. However, this system lasted less than 30 years.
The Smithsonian Accord was signed In 1971 in response to the economic crisis of the time. In fact, it was this document that caused the subsequent devaluation of the American currency. The agreement was signed by 10 states at the Smithsonian Institution.
The agreement resulted in three key decisions that the American president described as historic. First and foremost, the criteria for revising the exchange rates were agreed. This led to the subsequent decline of the US dollar. At the same time, the value of other currencies of countries from the so-called “Group of Ten” rose against the dollar.
Another important result is the setting of a limit for exchange rate fluctuations. This made it possible to temporarily exclude floating exchange rates and their sharp fall.
Finally, the United States agreed to remove the 10% foreign duty surcharge. As a result of this agreement, the price of gold rose to $ 38 per ounce, exchange rate fluctuations increased to 2.25% in relation to par, and, finally, the value of many currencies changed.
Despite the fact that the Smithsonian Agreement played an important role, it was the Kingston Meeting of the IMF member countries that laid the foundation for the modern Forex market. Let's look at the main changes in the world monetary system:
- Cancellation of the exchange of dollars for gold. From this point on, no other currency is tied to the gold standard. Gold has become a commodity market instrument.
- IMF member countries have been able to choose their own exchange rate regime. In total, there are three main types: a free floating rate, limited (a corridor to some currencies and floating to others) and fixed.
- There is a new type of international means of payment: SDR (Special Drawing Rights).
- Countries have received more opportunities to conduct independent financial policies.
Forex Market Key Participants
Forex market participants include banks, various funds and financial organizations, brokers, dealing centers , private traders and investors. Let's take a closer look at each of the groups.
Central banks are among the key players in the currency market. Their main task is to maintain the stability of the national currency exchange rate and fulfill certain economic and financial goals.
In modern realities, Central Banks have several mandates, among them, for example, achieving certain inflation or labour market targets. The Central Banks achieve their goals, among other things, by targeting (controlling) the exchange rate levels in the international arena.
Central banks can influence the currency market through direct interventions, as well as through interest rate changes or verbal influence (when executives make comments in which they can point out too overvalued or, conversely, undervalued national currency).
Commercial banks are the main players in the international currency market. The vast majority of operations go through them. They are intermediaries between companies engaged in foreign economic activity. Commercial banks are also aggregators and providers of liquidity, that is, market makers.
Various financial organizations and funds can also be noted here. Their main goal is to increase clients' capital and work with assets. The best known is George Soros's Quantum. Also, notable organizations include “Omaha Oracle” Warren Buffett's Berkshire Hathaway. Although the latter is unlikely to resort to investment strategies aimed at dealing with currencies. They definitely use Forex services to buy securities on local stock exchanges.
Dealers and brokers are another group of Forex market participants. These are companies providing services to private traders and investors. Here, clients can open trading accounts, make transactions using a variety of trading platforms, undergo training, work with analytics and much more.
What is the difference between a broker and a dealing center? The key is that the broker acts as an intermediary between the trader and the market. The dealing center is also a market maker, that is, it itself acts as a market for its clients.
However, at present there are almost no purely dealing centers. All companies, basically, work on a mixed principle. For clients with small trading accounts and turnovers, they act as a counterparty, and for larger traders and investors - as a broker, that is, an intermediary connecting traders with liquidity providers such as large international banks.
Traders and Basic Principles of Work in Financial Markets
As mentioned above, traders are also participants in the Forex market. They, among other things, maintain the level of liquidity, which is a positive point for currency trading. These market participants perform their trading operations through the trading terminal offered by the broker.
Before starting trading, a trader needs to complete some preparatory activities. First of all, you need to learn how to open a trading account and where to do so. To do this, you can familiarize yourself with the trading conditions of the broker NordFX and open your account with this company.
The Forex trading scheme is quite simple - you open a trading account, download the trader's terminal and start making trades. However, in order to trade Forex profitably, this is clearly not enough. You need to gain some knowledge, develop your own trading system, fund your trading account and carefully monitor your risks. At NordFX, transfers to a trading account can be made from bank cards and accounts, as well as through electronic payment systems and even cryptocurrencies.
As for the trading platform, NordFX experts have selected the most popular software in the professional community - MetaTrader (MT4). Moreover, such a platform is available both for desktop solutions (PCs and laptops) and for the most popular mobile operating systems (Android and iOS).
The MetaTrader terminal is one of the most functional solutions on the Forex market. It offers a rich toolkit not only for opening positions and tracking quotes, but also for analytical work, using trading robot advisors and even testing strategies.
Moreover, MetaTrader is written in an open source language, which allows you to create your own indicators, scripts and algorithmic programs (advisors) that will trade for you in a fully automatic mode.
To work successfully on Forex, a trader must be familiar with the following aspects:
- Types of market analysis.
- Work with analytical tools (graphics, indicators, news).
- Creation of one's own trading strategy and system.
- Learning the basics of money and risk management.
- The psychology of trading.
Trading is carried out with real money. But before you start, you can try your hand at a demo account . This is a special training account that allows a trader not only to study the trading terminal without any financial risk, but also to work out their own strategies.
You can open a demo account at the brokerage company NordFX. All quotes that come to the terminal on such a training account are real. That is, you will be able to try your hand at real market conditions.
Once you have completed your training, you need to top up your trading account and then you can get to work. As noted above, trading strategies are fundamental. They allow the trader to predict future asset fluctuations in the Forex market.
Such strategies can be both borrowed and created by the broker'sclient itself, if they have enough knowledge to do so. The most popular among traders are indicator trading tactics, based on indicators of technical analysis.
They are easy to find in the MT4 terminal. But you need to carefully study how each indicator works before using it. Today, four main groups of such instruments are distinguished:
- Trending.
- Oscillators.
- Volume indicators.
- Indicators that reflect the volatility and strength of the trend.
Working with the MetaTrader trading platform, you can simultaneously use one or more indicators already built into it and add to it your own ones created by you or other traders.
Some Forex Trading Recommendations
It is not enough to have a good trading strategy for successful trading. It is very important to follow certain rules and recommendations that we give below.
Study the asset carefully.
Before you start working with a particular currency, you need to carefully study it. It is important to pay attention not only to the chart, but also to the schedule of important economic events and publications. Among them, for example, meetings of Central Banks, business activity indices, data on the labor market, statistics on inflation.
Even if you do not plan to engage in news trading in the future, you will need to know the exact time of the news release, since these are periods of sharp jumps in rates and increased volatility in the financial markets.
Work systematically.
The biggest problem for many novice traders is that they do not know how to work systematically. Even with a rather interesting and profitable strategy behind them, such market participants, under the influence of emotions, often deviate from its main provisions and open trades at random, intuitively. As a result, they lose their money easily and quickly.
In trading, discipline is one of the key factors. Traders who do not have it do not succeed. Those who strictly follow their trading system are much more likely to increase their deposit.
Controlling emotions.
Emotions and psychological state play a very important role in trading. You need to learn to rule out negative thoughts from your work. The mistake of most traders is that, having made one or several unsuccessful trades, they start trading in order to win back. It happens the other way around — under the influence of greed, a person opens one trade after another instead of stopping in time.
A professional trader makes decisions based solely on the situation on the chart, their own analysis and trading system. Emotions are completely excluded from their work. If you cannot cope with them, it is better to use the opportunities for automatic or social trading that the broker NordFX provides to its clients - this is the use of robot advisors in MT4 and PAMM accounts, and the automatic copying of trades of experienced traders in the Copy Trading system.
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