A Brief Overview of the Foreign Exchange Market


The foreign exchange market, also known as forex, has been increasing in popularity in recent years. The reasons are numerous but most notably these include:

  • Loss of faith in other investment vehicles
  • Unprecedented access to the market due to the internet
  • Leverage providing opportunities for greatly enhanced profits
  • Overall frustration with the workforce and current job prospects

The Basics At the most basic level, foreign exchange is a market with exceedingly high volatility, which leads to its inherently high risk being mitigated by the lure of high rewards.

To some, forex has become associated with work at home advertisements and software scams. While foreign exchange tutorials and software are not necessarily scams in themselves, the authors may charge a premium for basic information that leaves the consumer unprepared for the realities of such a complex market.

Tutorials and software alone are not adequate preparation for trading in such a volatile and unpredictable market.

Bots: In addition, there has been a rash of programs known as bots which trade forex automatically using software to execute a certain trading strategy.

The unregulated FX market
The unregulated FX market

While there may be exceptions, usually these forex bots do not perform well, and tutorials and software alone are not adequate preparation for trading in such a volatile and unpredictable market.

In practice The foreign exchange market itself works quite simply, and you’ve probably already transacted in it. It begins like this: you have 100.00 in United States Dollars, which is at the time worth 93.64 Swiss Francs. You purchase these 93.64 Swiss Francs, and then the United States Dollar plummets; now those 93.64 Swiss Francs are actually worth 102.58 USD.

You exchange these dollars, paying your broker a fee of 0.18, and at the end you have made a profit of 2.40 USD. Of course, if this was really the forex market you would likely have traded 100,000.00 USD or more, probably on margin, and the profit you made would have been closer to 2,400.00 USD. This is assuming the Swiss Franc didn’t happen to plummet instead, in which case you would have lost the money.

Brokers There are numerous online retail brokers (see more) that allow clients to open a foreign exchange trading account, some with extremely low starting balances. Oanda and FXCM are two such examples.

Oanda has stated in the past that over 50% of their clientele is profitable, and they consistently report extremely low fees. FXCM has less freedom than Oanda for lot sizing and mobile options, but a more robust trading platform. It shouldn’t be forgotten that in the world of forex, more freedom can actually just mean more rope to hang oneself with.

The foreign exchange market is immense and always changing, and good traders need to be able to adapt with it. Being profitable over the long-run requires:

  • Experience
  • Skill
  • Having the right mental attitude
  • Analysis of key research, technical, and economic data
  • Applying a consistent, profitable trading stratagy
  • Perseverance

Above all, don’t be fooled by “magic trading techniques” promising easy and risk less profits.

Be Skeptical As always, there is no such thing as a free lunch. If it sounds too good to be true, it is, and the second a man in a video starts telling you about the miracle of leverage and how it will turn a hundred dollars into a million dollars over the next year, run.

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About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

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