Is it possible to earn on Forex?
This question is asked by everyone new to the currency market. If this were not possible, then there would be no cases of making money on changes in exchange rates.

The article covers the following subjects:

• What Is Forex?
• Types of Forex Market
• What Moves the Forex?
• Is Forex Legit?

What Is Forex?

Forex (FOReign EXchange) is the global currency market. It is a network of national and commercial banks, brokerage companies, and other economic agents engaged in purchasing and selling currency.

The foreign exchange market is the most liquid in the world. Its daily trade turnover reaches 7 trillion USD. Such volumes have become possible due to the market's global nature and online transactions.

Unlike stock markets, Forex does not have a single center within which currency trading occurs. Partly because of this, it operates around the clock (except on weekends) and without clearing breaks, which is typical for exchanges.

Forex transactions are divided into:

• hedging;

• trading;
• speculative;
• regulating (are carried out by central banks to regulate exchange rates).

Know Your Forex History!

With the development of international trade at the end of the 16th century, people were faced with the fact that the coins of different countries had different weights and denominations. It was decided to switch to "identical" paper money, which can be exchanged for gold in a bank. Closer to the middle of the 19th century, the concept of “exchange rate in relation to gold” appeared. Thus the gold standard was born.

In 1944, the famous Bretton Woods agreement was signed to establish the International Monetary Fund. As a result, the US dollar and the British pound became international currencies.

In 1976, the gold standard was abolished, and exchange rates began to obey the market laws of supply and demand.

Since 1990, the Forex market has become available not only for large financial institutions but also for private investors and traders. After five years, it became possible to trade in the foreign exchange market via the Internet. Thus, 1995 marked the beginning of the modern Forex era.

Forex Market Structure

The main Forex turnover is provided by central banks and major commercial banks.

The main features of the FX market are its decentralization and round-the-clock trading. Forex is an over-the-counter market with no single center for trading. Round-the-clock weekday currency trading has become possible thanks to four trading sessions, each moving to the next one within 24 hours a day.

Market Size And Liquidity

The Bank for International Settlements is studying the volume of the world currency market. Bank officials release a Forex liquidity and trading volume report every three years.

Since 1989, daily turnover has grown by an average of 25-30% in almost every reporting period. The dynamics have remained over the past ten years.

• 2010 – $4 trillion in a day;
• 2013 – $5.3 trillion in a day;
• 2016 – $5.1 trillion in a day;
• 2019 – $6.6 trillion in a day;
• 2022 – $7.5 trillion in a day.

Source: BIS Triennial Central Bank Survey.

Types of Forex Market

Three key types of foreign exchange markets are spot, forward, and futures. The difference between the markets lies in the delivery time. It can be fulfilled instantly or on a specific date.

Spot Foreign Exchange

In the spot market, trade is settled at the time of its conclusion. For example, if you bought a euro at 15:00 today, this currency will immediately appear in your account. Sometimes, this process can be delayed up to one or two days.

There are three types of contracts in the Forex spot market:

TOD. (today). The cheapest one. Payment is made during the day.

TOM. (tomorrow). Payment is made on the day following the transaction.

SPT. (spot or Т+2). Payment is made two working days after the conclusion of the trade.

With deferred settlement, the key rate is added to the size of the trade. In the case of TOM and SPT, for one and two days, respectively.

Forward Foreign Exchange

A forward contract involves entering a buy or a sell trade of a currency pair in the future at a predetermined price. For example, you entered into a EUR forward contract at 15:00 today. This means that at some point in the future, you must buy, and the seller must sell the currency at a specified rate. Therefore, you will make a profit in the event of an increase in quotes in the future, as you will receive the agreed amount of euros “cheaper”.

The term of quotations of world currencies in the Forex forward market can reach up to one year. The longer the contract term, the lower the liquidity will be.

Futures Forex Market

The settlement of a futures contract, like a forward contract, is performed in the future. The main difference is that the execution date for a futures contract is strictly defined. Also, a futures contract can be resold to a third party, unlike a forward contract.

The parties choose the futures market if the buyer wants to insure against a decrease in the price of an asset and the seller against its increase.

There are two types of currency futures:

• contracts with settlement currency in US dollars (for example, GBP/USD);
• transactions based on cross rates of other currencies (for example, USD/TRY).

What Moves the Forex Market

On Forex, various surges are possible, inexplicable at first glance. They are often associated with global events that affect the global economy.

The scale of central banks' activities, macroeconomic news in the world's most developed countries, natural disasters, and other factors can affect currency quotes.

Central Bank

The main function of central banks is to ensure the stability of the national currency.

Changes in interest rates and foreign exchange interventions have the most significant impact on Forex quotes.

Central banks raise interest rates to fight inflation and lower them to stimulate economic growth.

The Central Bank directly affects the national currency's exchange rate through interventions by buying and selling currency on Forex to increase or decrease the exchange rate to target values.

Sometimes even rumors about the intervention of the Central Bank can affect the exchange rate.

News Reports

As traders, we are interested in events that have a meaningful effect on quotes in a short amount of time.

The most significant price movements accompany news with so-called high priority. These are:

• Employment/unemployment levels;
• GDP (gross domestic product) of developed countries;
• Bank interest rate decisions;
• Monetary policy committee meeting.

You can analyze the list, date, and time of news reports in the LiteFinance economic calendar. You can set the display of high-priority news only. As a rule, the release of other news is not noticed by the market.

Is Forex Legit?

Is Forex trading legal? Many are interested in the answer to this question. Remember, the foreign exchange market, as well as the activities of Forex brokers, are regulated by law.

It's not necessary for brokers to have a license to enter the interbank market. However, licensed brokers are more reliable because they are regularly audited, keep transparent accounting and have a compensation fund.

Three main bodies issue licenses confirming the reliability of a Forex broker:

• US Commodity Futures Trading Commission (CFTC) and US National Futures Association (NFA).
• The UK Financial Conduct Authority (FSA) and the Australian Securities and Investments Commission (ASIC).
• Cyprus Securities and Exchange Commission (CySEC) and Malta Financial Services Authority (MFSA).

For more information contact,
Shaket Verma
+971 50 858 428