Currency exchange: play and earn
The strategies of the game in the foreign exchange market are sometimes reminiscent of Greco-Roman wrestling. Some players (“bears”) seek to “crush” the exchange rate under themselves, seeking to reduce it, others (“bulls”) – on the contrary, having got up from below, want to rise along with the rate. The player can constantly adhere to one strategy or alternate them. Only one of two succeeds to emerge victorious from the next round …
The time of making a transaction on the currency exchange does not exceed two or three minutes (the same period lasts in the Greco-Roman wrestling), but in practice it is calculated in tens of seconds, since exchange rates can change at a dizzying speed. This is a truly addicting game that anyone can take part in – it is important to be an athlete by nature.
World currency market: rules of the game on exchange rates
The foreign exchange market is a platform for a huge number of players – financial institutions that trade currencies among themselves in a non-cash form. The virtual currency exchange (actually the OTC market) is known throughout the world as Forex. Its daily turnover is about $ 1.5 trillion. The main currencies on this exchange are the US dollar, euro, Japanese yen, Swiss franc and British pound sterling. The exchange rate of one currency relative to another is determined by market conditions, that is, the ratio of supply and demand for the currency of a particular country.
Currency rates are constantly changing in relation to each other. The main principle that allows you to make a profit in the foreign exchange market is to buy a currency, which should subsequently rise, and sell it before the rate falls. The advantage of the foreign exchange market over the rest (commodity market, securities market) is that it is the most massive, universal and accessible to the understanding of the ordinary population.
How does it work in practice?
Let's say that for 1 hour € 1 began to cost not $ 0.91, but $ 0.92. This, at first glance, a slight change of one cent with large volumes of purchases at $ 0.91 per hour translates into tangible profit. For example, buying € 100,000 for $ 91,000 and selling the same € 100,000 for $ 92,000 an hour later would make a profit of $ 1,000.
Market participants are national (Central Banks) and commercial banks, brokerage houses, corporations and export-import firms, various funds, individual investors. The goals of market participants can be very diverse, from the conduct of foreign exchange interventions by national banks to the extraction of benefits by traders from exchange rate fluctuations.
To start trading on the currency exchange, it is enough to register on the website of a reputable brokerage office, make a deposit and receive credit funds (leverage) for virtual trading. Leverage can be calculated in various ratios of 1:10, 1: 100, or even higher, it depends on the broker's credit policy and the level of trust in you. For forex dealers licensed in Russia, a legal requirement has been introduced to limit the size of the maximum leverage – it cannot be more than 1:50.
What is leverage and how does it work in practice?
Leverage is financial leverage, a kind of short-term targeted loan that allows a client to open positions that are several orders of magnitude larger than the amount of the insurance deposit made by him. By depositing $ 100, you can control significantly more money thanks to the leverage provided by your forex dealer. “How is this possible?” – you ask.
Let's say you trade with a leverage of 1: 100, which means that a $ 1000 deposit allows you to open a position for $ 100,000. But the risk increases in the same proportion. And a change in the exchange rate, for example, of the dollar to the euro, from only 1.355 to 1.345 nullifies your deposit. After that, access to operations will be automatically blocked for you. Such fluctuations are rare at once, but fluctuations from 1.355 to 1.353 regularly occur within a trading day, and they are enough to lose your deposit when trading with a leverage of 1: 500.
To put it more simply, you deposited $ 100 and bet $ 100,000 on the raise. However, they made a mistake, having received a reduction: $ 100,000 turned into $ 99,900. At this moment, your deposit becomes exhausted, you either need to replenish it, or you will lose your $ 100 … But at the same time, everything can be the other way around! It is, of course, the player himself to decide whether it is worth the risk when choosing a broker with high leverage, taking into account his own preferences.
Forex market instruments
Participants in exchange and over-the-counter currency trading use a number of special tools that allow them to most effectively manage cash flows. By concluding deals on certain conditions, you can significantly reduce possible losses during market fluctuations.
Spot. This is a settlement condition in which payment for a transaction is made almost immediately – within two days. The most popular tool that allows you to quickly access your profits and put them into further circulation or exit the game. It is used to play on the stock exchange, both for beginners and experienced traders.
Forward. The forward settlement is deferred for a specified period in the future. At the time of the conclusion of the transaction, the currency, amount, exchange rate, and date of payment are recorded. Payment terms can range from 3 days to 5 years. Most often, the terms are set at 1, 3, 6, or 12 months. Forward contracts are entered into in the over-the-counter market, such as the interbank market. The amount of currency can be any by agreement between the parties to the transaction.
Futures – an agreement under which the seller undertakes to deliver, and the buyer – to pay and receive the specified standard underlying asset (currency) on a specific date at the price specified at the time of the transaction. Thanks to this, the risks of suppliers and buyers associated with future price changes are insured.
Option. A currency option is a transaction that provides the right to buy or sell a specific lot of currency at a fixed price for a specified period of time. This tool helps the buyer of the option to insure himself against possible losses due to changes in the exchange rate. The option buyer is not obliged to buy or sell currency on the given conditions – he pays for the right to perform this action if he considers it beneficial.
A currency swap is the sale of an asset (currency) and at the same time accepting an obligation to redeem it back at a fixed price. Such transactions are called repo transactions, which from an economic point of view are analogous to lending against securities. A swap can be used to change the composition of a foreign exchange portfolio when the required currency is borrowed for a certain period against the collateral of another currency.
Working on demo accounts will help you to fully understand the essence and capabilities of foreign exchange market instruments. Every major online broker provides this service for beginners, allowing them to practice exchange trading without losing money. Brokers are interested in you getting used to the market and successfully trading – this is an integral part of their work and professional success. It is not profitable for any brokerage office that you lose and, as a result, leave the market. The reason is that the service provider takes a commission for the transaction, and if there are no transactions, there is no income.
The modern foreign exchange market: yesterday, today, tomorrow
In its modern form, the Forex market has developed due to many circumstances. In the late 1970s, large financial institutions entered the foreign exchange market: banks, hedge funds, and brokerage firms, as well as private traders. And if earlier currency trading was controlled by national banks and governments and was carried out at fixed rates, now we are talking about a competitive price, which was formed on the basis of supply and demand. Even at that time, world trade was sufficiently developed to establish a system of free mutual currency conversions, to say nothing of today … The rapid growth of the Forex market, coupled with the introduction of the latest technologies, erased interstate and time borders for traders, making it possible to trade currency around the clock … The widespread use of the Internet has opened the way for private investors to enter the foreign exchange markets. In the near future, the number of individuals trading on the stock exchange will only grow. This is due to the global financial and political upheavals, which open up huge opportunities for profit from currency fluctuations – it is only important to learn how to play correctly on the stock exchange.