Forex (a portmanteau of “Foreign Exchange”) is an international currency exchange created all the way back in 1980. Originally it was designed for the government and international banks, but these days anyone can trade on Forex.
Forex is considered the friendliest market for traders since you don’t need a substantial starting capital to start trading there. It is also very predictably volatile, so even a newcomer can achieve 5-10% of daily profit — as long as they know what they are doing.
Brief History of Forex
Following Ronal Reagan’s abolishment of the golden standard for the USD, the worth of the currency started to depend on supply and demand only. The resulting economic collapse facilitated the creation of the new currency exchange system. So while there have been different currency markets even back in Medieval Europe, the global currency exchange became possible only in the late XX century.
For a long time, Forex was available only for the national banks and some global corporations. However, in 1996, as the internet became more and more common, the decision was made to invite smaller companies and even individual traders to the market. The cost of running a direct Forex terminal is still high — north of 6 000 USD/month — but at least it’s possible.
How Does Forex Work?
The rules of supply and demand govern Forex. The major players evaluate the economic performance of the countries and trade the currency of those who perform worse for the currency of those that perform better. The changes in trading balance create changes in the exchange rates — a.k.a. volatility — which is what the individual traders profit from.
Private currency trading, for Forex, is a tertiary feature at best. The Exchange exists to make international trade easier and constantly supply global corporations with the currency they need to trade abroad. This is why a lot of professional traders consider Forex as a less “true” market, compared to stock exchanges. The feeling is emphasized by the very low entry barrier for Forex, which attracts a lot of newcomers who don’t know what’s trading and how it works.
How to Invest in Forex
Forex is not an investment opportunity — there is no passive income to speak of here. Unlike the stock market (or any commodity market, to begin with), your investments in Forex do not grow in value with time. Instead, they lose it due to inflation.
It doesn’t mean that Forex cannot be a source of income. Trading is the star of the game here and provides ample opportunities to make money, as long as you know what you are doing. Successful traders can earn 5-8% profit daily — or 100-160% monthly. There isn’t any other market where private traders can make this kind of profit.
How to Trade on Forex
Most traders can’t afford a dedicated banking terminal and trade using brokers — companies that provide access to the Forex for the small-volume traders.
The brokers make money with the spreads — the difference between the buying and selling prices of the currencies. It does create some complications for the traders, but it’s a lot more reasonable compared to running a separate banking terminal. At least, until you start trading with hundreds of thousands USD.
As with any other market, the rules are “sell high, buy low.” The problem is that the brokers and the individual players are not making the market on Forex — the banks do. So you can’t just blindly trade, hoping to make money. You need to have a strategy.
The most newb-friendly strategies are “lazy river” scalping, Price Action trading and trend-trading. We highly recommend you take a shot at each using a demo account before you start trading live money.
Forex is a robust international currency market that accidentally provides good trading opportunities for the small-time traders. It is not a holy grail of passive income and a bad investment opportunity, but if you are willing to learn to trade — you will easily make money on Forex.