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?
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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
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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.
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Thanks for watching and until next time.