Forex (short for foreign exchange) boils down to changing one country’s currency into that of another. This is done for a variety of reasons, although the most common ones are commerce and tourism. Given the fact that the world of business is obviously global, there is always a need for making transactions with other countries in their own currency.
Along with crypto trading, forex is currently the most popular investment method. Although it is very speculative, the ease of its use the internet has brought to the table has made this trading type quite lucrative.
The fact that forex is a highly speculative market doesn’t mean that it any less lucrative; in fact, this speculation is based on various supply and demand factors, which are all influenced by things such as trade flows, interest rates, economic strength, tourism, geopolitical risk, etc. The majority of successful forex traders get into this market, exactly because of its speculative nature. Essentially, whenever a currency value drops, there’s an opportunity to obtain a certain amount of it; for the now-lower price, of course. The key here is being aware of all the abovementioned factors and being able to a draw a conclusion whether and when the currency in question will skyrocket or continue dropping in value.
However, owing to exactly these market fluctuations, commercial enterprises that are doing business in foreign countries are exposed to a lot of risk for obvious reasons – with the huge amounts that they are dealing with, even the slightest price change can mean severe losses. This is why foreign exchange markets have a way of hedging the risk by fixing a rate; once this transaction is concluded at some point in the future, it is done at the previously fixed rate.
This is achieved through buying or selling currencies in the swap or forward markets – at this point, the bank locks in a rate, and the trader benefits by knowing exactly what the exchange rate will be, thereby mitigating the risks.
If there was a surefire way to earn a lot of money without any risk, we’d all be doing it. Make no mistake, once you start trading on forex, you’re going to have to be careful.
This being said, there are a lot of rumors going around about the interbank market being very risky due to a lack of regulation and oversight. This isn’t entirely true. In order to understand the risks involved, one needs to comprehend the differences between a centralized and a decentralized market.
Although the interbank itself isn’t really regulated (it is made up of many banks trading amongst each other), the involved banks are the ones that determine and accept credit and sovereign risk, and there are a ton of internal auditing processes dedicated to this.
Many fear the rogue traders who can, in theory, influence the price of a currency. The market pricing mechanism depends on supply and demand, given that its very essence is based on each of the participating banks providing bids and offers. So, what’s there to stop the rogue traders from shifting the market to their own benefit? Well, quite blatantly put, the sheer volume of the modern market, which rests on a steady ballpark of $2 to $3 trillion being traded on a daily basis means that not even a central bank could move the market for any length of time, unless other central banks decide to fully cooperate and coordinate with it.
Although traders who have direct access to forex banks are less exposed to risk than those who deal with small and unregulated forex brokers, there are many legitimate and respectable fx broker platforms that quote fair prices and treat their customers with dedication and respect. Large, more liquid brokers are trustworthy and will never trick you into thinking that certain trades will lead to a profit.
Forex trading is far less risky than some sources would have you believe, but not as profitable as small and unregulated forex brokers will tell you. In truth, this market revolves heavily around speculation, but there are ways of hedging the risk. The interbank may not be a regulated entity, but it really isn’t an entity to begin with – the safety here is put into the hands of participating central banks. Finding a trusted, liquid broker and being wary of the risks involved is what leads a forex trader to success and profit.