This is a question I hear literally every day. If you’ve been keeping up with my previous blog posts, you may have noticed I don’t spend a lot of time focused on this question. Instead, I focus on either business in general, or the business of trading. In a simple answer, yes, Forex is very real and you can really make money in Forex trading.
Since I have seen this question asked so many times, I figured it would be best to address it directly. So here we go.
In order for you to best understand why the answer is yes, you need to have a broader understanding of what Forex is all about. You need to look beyond the perspective of someone sitting in their home trading on a platform.
What is Forex?
Forex in its purest understanding is the movement of money. Not just some money, all the money. Every single purchase, every single exchange constitutes the underlying transfer of assets or services from one party to another. The Forex market is a value measure of the movement of that money.
Let’s look at this in terms of investment. When a person buys a product, lets say in the US, they are exchanging their money for the product. In essence, they are saying, the product is worth more than the dollars they are giving up for that product.
Now lets say that the product was built in Canada. The business who sold the product takes their cut of the sale. The remaining amount is attributed to the cost they paid of that product. Either through credit or direct sale from the manufacturer in Canada.
The seller either paid already for the item, or has an outstanding debt to their accounts payable. This means the manufacturer allowed the seller to purchase on credit and will receive payment at another time. Essentially giving the seller time to make sales in order to raise cash to pay back the debt.
It is that payment between manufacturer and seller that Forex primarily focuses on. Forex also includes the transaction of the customer and the seller. The movement of the money.
How Does This Translate Into Forex?
We have here two movements, the money from the seller to the Canadian manufacturer, and the consumer to seller transaction.
Now lets say the item cost $100 USD to the consumer from the seller. The seller paid $40 USD from the manufacturer. The seller than keeps $60 USD. In this example, the seller purchased using $40 USD that the Canadian manufacturer must convert into CAD. We have an exchange of currency. Movement of one currency of value to another currency of value.
In this transaction something else also occurred that’s not that obvious. The seller took US dollars and sent them by transaction to Canada. This increasing the amount of Canadian dollars and decreasing the amount of US dollars available. In trading we see this as volume. There is an increase in demand for Canadian Dollar, represented by the product. Likewise, a decrease in demand for the US dollar. Remember, the seller believes the Canadian product is worth more than his USD. He is therefore investing in Canada with his USD. This is a Forex exchange and what effects whether you really make money trading in Forex.
What we now need to do is extrapolate that amount by literally trillions and hundreds of millions of dollars. Transactions of every type, every single minute of the day. This is the Forex market.
Why Does One Country’s Currency Increase or Decrease Over Another’s?
Beyond the purchasing of assets or services, we also have a tremendous amount of money moving. The majority of money moves between governments and investment banks. Governments constantly do business with one another, moving massive amounts of money from one currency to another through these transactions.
Investment banks generally are responsible for ensuring their customers monies are receiving the highest rate of return available. So they in turn are also moving tremendous amounts of money between companies and countries, investing in stocks and bonds. They are also responsible for avoiding risky investments and loss as best they can. If you want to know, can you really make money trading in Forex then just look at the investment banks.
If Japan reports an increase in unemployment at the same time Australia reports a decrease, Japan’s economy looks like a greater risk. Australia looks like a safer economy. Investors who monitor these economic changes. They will decide investments held in japan might depreciate in the near term. To avoid the risk, they move their invested dollars into investments in Australia.
Likewise, investors who haven’t made investment in Japan, may withhold investment and turn to the safer market of Australia. These transactions also occur continuously throughout the day, every single minute of every day. They occur both on the micro and macro levels. On Saturday & Sunday, when Forex markets are closed, this explains the gap up or down in prices at market open.
Supply & Demand
What you are witnessing on your trading charts are these movements of money in terms of supply and demand. In order to understand this you need to know the principles of economic law in regards to supply and demand.
There are four basic laws of supply and demand.
- One, if demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity.
- Two, if demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity.
- Three, if supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.
- Four, if supply decreases and demand remains unchanged, then it leads to higher price and lower quantity
Equilibrium is perfect price, where the availability of supply matches the amount of demand. It is the price at which their is a steady amount of consumers willing to pay. It also means a steady amount of supply is available.
If their is a change in supply available or a change in demand occurs, price changes. Investors are attempting to naturally find the equilibrium price again. Since supply and demand are almost constantly changing, price is also constantly changing. This the movement of price up and down on your trading chart.
How Can This Help You Really make Money In Forex Trading?
So how can you really make money trading in Forex? By analyzing the fundamental and technical aspects of a pair of currencies. This is how you can make predictions in regards to supply and demand. Your goal is therefore attempting to understand overall market sentiment in relation to price equilibrium.
When examining confluences to suggest price direction, those confluences show you either greater or less than perfect supply or demand. In other words, where is equilibrium? Is it found above or below the current price.
How do you recognize equilibrium? When price consolidates and moves sideways. At consolidation and price perfection, either supply or demand will change based more upon fundamentals than technical indications.
In this example, when price reaches a previous area of equilibrium, price finds resistance to move higher and consolidates again. At this point, another factor comes into play. Liquidity.
What is Liquidity?
At either point of consolidation, either the higher or lower price, there is an imbalance in buyer vs. sellers. For every asset sold, their needs to be an buyer and vice versa. So when we see a market rally higher, price increases.. Based on economic law, we know as price (demand) increases, supply decreases. The market finally settles and is content with equilibrium. But, their are now more buyers holding the asset then their is an available supply to support further demand.
So what happens now?
Supply must be increased greater than demand to meet the additional demand interest beyond equilibrium. Buyers no longer seeing demand now look to sell the asset and capture gains. Since the liquidity is greater on the buy side, as they sell, the liquidity shifts towards the seller side. Eventually meeting price equilibrium again. Then the process, or cycle, starts again.
Recognizing the overall trend. Know where you are in the cycle, and you can then begin to predict where price may be heading.
How Does This Prove You Can Really Make Money In Forex Trading?
Two things should easily cull this question out of your mind forever.
- Money is real
- Money move
So can you really make money trading in Forex? As long as money is real and moving, and there is not a singular global currency, Forex markets will exist. They are a necessary aspect of every economy. As a trader, you are playing a part in the movement of that money with every trade you make. You’re taking part in the overall foreign exchange of currencies that occur continuously every single moment of every day.
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