Forex is short for "foreign exchange." There are multiple markets around the world that trade currencies.
Forex is similar to what you do at the money changer at the airport, except on a bigger scale. Also, at the currency exchange points you always lose money, however, in forex trading, you have the chance to make a profit.
Foreign exchange trading has many uses, and it's mainly used by companies that deal in multiple currencies and hedge against the risks of unfavorable currency rate movements.
Contrary to what many beginners think, the individuals who speculate on the forex market make up the smallest part of the forex market.
Just like stocks, the value of any particular currency changes over time against other currencies.
There are two ways to make money with forex trading:
#1. Buy low and sell high (long trade)
A “long” position means you are betting that the value of the asset will rise.
#2. Sell high and buy low (short trade)
A “short” position means you are betting that the value of the asset will decline.
If you consider shorting stocks, keep in mind that shorting stocks is riskier than going long. Here's why:
#1. Unlimited downside risk: When you go long on a stock, the most you can lose is 100% of your investment, but when you short a stock, there is no limit to how high the stock's price can go, and therefore, no limit to how much you can lose.
#2. Forced buying: When shorting a stock, you are borrowing shares with the expectation that the price will fall. If the price of the stock instead rises, you may be forced to buy the shares at a higher price than you sold them in order to close out your short position, resulting in a loss.
#3. Short squeeze: When a stock's price starts to rise, short sellers may be forced to buy shares in order to close out their short positions, which can push the stock's price even higher and cause short sellers to incur additional losses.
#4. Leverage: Short selling involves borrowing shares to sell, which means you can control a large position with a relatively small amount of capital. However, this leverage also increases the potential for significant losses. This applies also to forex.
How big is the forex market?
The forex market is the world's largest, most liquid market, with a daily trading volume of over $5 trillion.
The foreign exchange market is enormous even when compared to the biggest stock exchange markets.
The most prominent players in the forex market
You should know the big players in the forex market because they can crash or boost the currency rates with just one announcement in a press conference or one significant transaction.
Can you name the heads of the biggest central banks?
Pro traders closely follow the announcements and body language of G-7 officials.
G-7 (Group of Seven) is a forum of the world's seven most developed economies: the U.S., Germany, the U.K., France, Japan, Canada, and Italy.
The key people to follow and listen to from these countries are:
Head of the central bank.
Prime minister.
President.
#1. Governments and central banks
The most significant players in the forex market are governments and central banks that buy and sell currencies to balance their nations' economic growth and price stability.
The amount of money used by central banks is enormous, so their actions profoundly impact the currency markets.
#2. Commercial and investment banks
Big banks trade billions of dollars daily. They make transactions with each other, with their customers, or they themselves speculate on the forex market.
Here are some of the biggest banks in the world based on total assets:
Industrial & Commercial Bank of China: $4.65 trillion
JPMorgan Chase - $3.13 trillion
Mitsubishi UFJ Financial Group (Japan) - $3.1 trillion
Bank of America - $2.35 trillion
Wells Fargo - $1.95 trillion
Citigroup - $1.91 trillion
Deutsche Bank AG - 1.498 trillion EUR
It's worth noting that the rankings of the largest banks can vary depending on the source and the criteria used to measure size.
#3. Large corporations
Large corporations control large amounts of money, so moving their assets in bulk can influence currency rates.
For example, the Japanese yen collapsed when the biggest insurance companies in Japan started to move their assets out of the country because of the yen's decreasing value and interest rates.
#4. Individual traders
A single trader or hedge fund can control a significant chunk of a large company's stock, so the stock price can sink when he sells all his shares.
However, the currency markets are so large that individual speculators can't influence currencies as easily as stock prices.
There have been cases in history when sole traders have shaken whole economies with their forex trading.
For example, George Soros played a crucial role in destabilizing the British pound back in 1992 when he shorted the pound and made about 1 Billion dollars in a day.
But George's trades were an exception.
Bottom line: Watch what the big institutions are doing, not what individual traders say.