Foreign Exchange — Forex
What is Forex?
Forex (Foreign Exchange) is a network where people from around the world access to exchange their currencies with each other at agreed-upon prices.
Whether willingly or not, we are part of Forex. Here’s an example: We are going to the United States with €1,000. When we arrive in the U.S., the exchange rate for (EUR/USD) is 1.20. We convert it into dollars and get $1,200. After staying there for a week without spending any money, when we convert back to Euro, we get €1,043.
What is traded in Forex, and who controls it?
Currencies traded in Forex include the US dollar, Euro, Japanese yen, and many other smaller currencies. Forex also offers trading of cryptocurrencies, stock indices, metals, futures, etc. The Forex market is decentralized, so it is not under the control of any single authority. However, four major banks — JPMorgan, Citi, Deutsche Bank, and UBS — constitute the largest markets in Forex and have significant influence.
Why does the exchange rate move?
In Forex, news and economic data play a significant role in market movements, and currency traders can profit from these factors.
Why Fiat Currency and not Cryptocurrency?
Trading cryptocurrencies and fiat currencies have similarities and differences. Cryptocurrency trading involves buying and selling digital assets, while fiat currency trading involves exchanging one fiat currency for another. Prices move higher when there are more buyers than sellers and fall when sellers outnumber buyers. Both markets are driven by the supply-demand balance. But which one is safer?
The blue indicator shows the average movement of Bitcoin each month since 2019, while the red indicator shows the average movement of Forex (EUR/USD). In this case, Bitcoin’s movement varies between 7.5% and 25%, while the movement of EUR/USD ranges from 1.1% to 1.4%.
Is Forex a game of chance that can lead to success?
Forex separates a thin line between a game of chance and a factor called Probability. For example, if we set a random trade with (1% risk, 1% reward), the probability of winning or losing the trade is 50–50. But can we implement a strategy to increase the likelihood of success? Strategy involves the likelihood of an event occurring more than another event. Searching “Forex Strategy” on Google yields around 57,800,000 different articles.
So, does using these strategies increase our chances of winning? Statistically, about 95% of Forex traders fail and give up in the first few years. Perhaps they do not study the strategies, leading to their failure? On the contrary, everyone uses well-studied strategies. Let’s take a probability example with a random outcome:
The Forex Head-Tail Paradox
Consider a novice trader who knows only Buy and Sell. Let’s guide them as follows: Flip a coin for each trade; if it’s heads, open a Buy position; if it’s tails, open a Sell position. Maintain a 1% risk and 1% reward for each trade. It would be very challenging, if not impossible, for them to avoid failure in Forex.
So, these pieces of information lead us to two subjects:
•Risk Management
•Market Manipulation
Risk Management
Risk management can be defined as: Are we emotionally and financially okay if we lose the percentage we risked on a trade? If the answer is yes, continue with the trade. If the answer is no, reduce the risk percentage. For example, with a €100,000 account and a 20% risk per trade, it would take only 5 consecutive losing trades to wipe out the account. In the same case with a 1% risk, it would take 100 consecutive losing trades to wipe out the account.
Five Basic Principles for Risk Management:
•Anything can happen.
•You don’t need to know what will happen in the future to make money.
•There is a random distribution between wins and losses for any given set of variables that define an edge.
•A strategy is nothing more than a marker of a probability that an event will occur more than another event.
•Every moment in the market is unique.
Market Manipulation
The Forex scandal (known as “Forex Rigging”) is a financial scandal from 2013 that involves the discovery and subsequent investigation that banks collaborated for at least a decade to manipulate exchange rates in the currency market for their financial gains. A trader with over a decade of experience mentioned that if they placed an order at 3:30 p.m. to sell €1 billion in exchange for Swiss francs at 4:00 p.m., they would have two objectives: to sell their euros at the highest price and also lower the rate so that at 4:00 p.m., they could buy the currency from their client at a lower price. On November 12, 2014, the UK’s Financial Conduct Authority imposed fines totaling $1.7 billion on five banks: Citibank $358 million, HSBC $343 million, JPMorgan $352 million, RBS $344 million, and UBS $371 million.
“Be Fearful When Others Are Greedy And Greedy When Others Are Fearful” — Warren Buffett
Summary
•Forex is the safest global market that allows the exchange of one currency for another.
•FOREX is not a quick enrichment scheme.
90% of traders lose 90% of their capital in the first 90 days.
•There is no crisis in Forex because currencies are always quoted in pairs.
•Low entry and transaction costs.
•Trading is a probability game.
•Risk management is crucial.
References
•https://www.businessinsider.com/what-is-forex
•https://www.babypips.com/learn/forex
•https://www.bbc.com/news/business-30003693
•https://www.bloomberg.com/news/articles/2013-06-11/traders-said-to-rig-currency-rates-to-profit-off-clients
•Mark Douglas — Trading in the zone
•https://forexclientsentiment.com/instrument/eur-usd
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