How does Forex work and is it needed?
When it comes to the stock market and trading on the stock exchange, the first thing that comes to the mind of many people is forex. Indeed, advertising this type of investment (although such operations in this market can be called a stretch) has penetrated many areas of our life - successful traders who earn thousands of dollars in parallel with their main job or lying on the beach look at us from posters in subway cars , and with banners on the web. Meanwhile, everything here is not so simple.
FOREX is an abbreviation for two words Foreign Exchange, which means Currency Exchange. The same word Exchange in English refers to the exchange or any other trading platform where the Exchange of some assets to others takes place, for example, trading in stocks or futures contracts and futures options. From here comes the first misconception about the nature of this market.
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Forex offices persistently call the game at exchange rates - either by trading on the stock exchange, or by investment. In reality, the lion’s share of the market for exchanging one currency for another takes place in the OUT-BIRD market between large international banks. This is a relatively "closed club", getting there is very difficult. Trade goes on very large sums. The minimum lot is the sum of 1 million dollars or euros, the standard - 5 or 10 million dollars.
Currency trading primarily ensures the export-import operations of bank customers, and secondly, but not least, the interests of their own trading and investment departments of international banks that conduct their investment activities around the world. It is clear that in order to become a client of an international bank and begin to buy and sell currency in order to extract "income" from the movement of currency rates, you need to deposit more than one million dollars.
In this case, trading will most likely be carried out without leverage and according to the quotes of the bank itself, and not of the free market. And the bank quotes will differ from those desired in the worst direction for the client. Well, it is natural: the bank, too, must earn! His traders will not work “for free”. From here follows the second and main misconception of people involved in forex trading. They think that their deals are really being brought to the market through a cunning system of “inter-broker relations”. However, it is not.
Most transactions in the real interbank market are made through a limited number of private information and dealing networks (for example, such well-known companies as Thomson-Reuters or Bloomberg), where the entrance from the street is simply ordered. Many networks do not have gateways that would allow external dealing systems to be connected to them in order to route client orders to the market. And “to drive” every client order into such a system is expensive and therefore not advisable.
Each transaction, which is made by currency dealers of banks through such systems, is then processed by the back office of the bank and on its third banking day it is calculated on the delivery or acceptance of the traded currency. It would be naive to believe that orders of customers of domestic forex brokers for 3-5-10 thousand dollars (and even 100 thousand) go to the real market. Nobody will either do such a small amount, neither confirm, nor process the transaction, nor make calculations on it. It is simply unprofitable.
Thus, it can be stated, and forex brokers are well aware that no transactions they enter into with clients are displayed on either the stock exchange or the interbank over-the-counter market. Where, then, are these deals executed? And who is the other side of such deals?
Many managers of forex brokers explain to clients a scheme of work like this:
This, of course, is not true. No forex broker almost never takes out a “deal” of its clients to the open market, be it a mythical exchange or a partner — the counterparty — a large international bank or an over-the-counter market — because he knows that the conditions of the game are such that the client will lose sooner or later. Therefore, there is no need to bring transactions to the market.
And who in this case becomes the second party in transactions? Where to find a counterpart? You don’t need to go far - the forex broker itself is the other side of the deal.
Thus, having concluded a contract with a forex broker, bringing him money, the client will make transactions with the forex broker himself. In this case, any loss of the client is a gain of the forex broker, and any gain of the client is a loss of the forex broker. And he is the loser, just the least interested.
The next misconception that the forex brokers persistently try to implant in the heads of ordinary people is that you can make very good money on the movements of currency quotes. If only correctly guess the direction of the course. But is it?
The standard example cited by employees of a forex broker is as follows. Consider the graph shown in the figure below, which shows the movement of the euro-dollar.
If the client sold on October 25, 2011, 1 million euros at the price of 1.390 EUR / USD, and on December 22 of that year bought the million at the price of 1.310 EUR / USD, as this is shown in the figure, then his profit would have amounted to 80 thousand dollars . Good money, isn't it? These $ 80,000 would be received on the $ 1,390,000 invested in the transaction, which in two incomplete months would yield a yield of 36% per annum. Not bad?
Yeah not bad. The trouble is that the average Russian investor does not have that kind of money. “It does not matter,” the forex broker replies to him: I will give you my shoulder !
You do not need to have a million in the account. All you need is $ 10,000. Then, with a leverage of 100, you can buy and sell lots in the amount of up to $ 1 million. And with a leverage of 150, up to one and a half million. ” So says forex broker. This means that if you have a leverage of 100, you must count the income not on the invested $ 1,390,000, but on an amount 100 times less !!! This, of course, increases the yield by 100 times and gives a fantastic 3,600% per annum !!! This is fantastic - anyone in the financial market will tell you. And he will be right.
Let's see what shoulder means in practice. The average daily fluctuation of prices for the euro-dollar currency pair is, according to the results of the last year's trading (from April 1, 2011 to March 29, 2012) 0.28%. This means that your investment of $ 1,390,000 daily experiences average cost fluctuations of about 4 thousand dollars, either plus or minus. This also means that approximately two and a half days of an average unfavorable movement for you in one direction is enough so that there is absolutely nothing left from the account of 10 thousand dollars. Your position will be closed, despite the fact that in the future you might be able to make a profit. These are the rules.
[ When the critical level of losses in an open position of the client is reached, the broker has the right to close it at the current market price by force. ]
In the case considered, when the client has an account of $ 10,000 and a leverage of 100, the exchange rate needs only to change by 0.01 (0.01 = 100 pips = 1 figure, 1% = 1 / leverage), i.e. from 1.390 to 1.400 so that your position will be forcibly liquidated by a forex broker and you will be left without money. With shoulder 50, the situation is somewhat better. Prices should change in an unfavorable direction no longer by 1%, but by 2% = 1/50, which is 200 pips or two figures, to put it in the terminology of currency speculators. However, even in this case, your position would be closed after only two days. The price movement for a figure or two is not a rare event in the forex market.
The fact that in the forex market with a leverage of more than 20 is almost impossible to earn, even correctly predicting the direction of the exchange rate in the medium and long term, unfortunately, there is a statistical fact that follows from a simple mathematical modeling of the exchange rate. At the same time it does not matter at all: do you suppose this movement of courses at the micro level to be fractal or purely Brownian.
The sadness of this fact stems from the randomness of the pricing process, on the one hand, and the limitations of your resources when working with leverage, on the other. In whatever direction you open a position when trading with leverage - sooner or later you will lose all your money. And no risk management, no money management saves from this disaster. The question can only be put this way: with what probability and for what time does the complete loss of all funds occur.
The more leverage - the greater the likelihood of loss and the less time needed to implement this adverse event.
A complete analogue of trading with leverage 2 on the foreign exchange market is playing at a casino at roulette. If you do not stop, then sooner or later there will be a sequence of events, when you lose all the money brought with you, as well as all the money earned before it, no matter what strategy you use.
According to materials posted on the RBC-Daily website and referring to Philadelphia Financial's research, Forex brokers clients lose their money at a rate of 60-80% per quarter.
Source: www.rbcdaily.ru
This means that about 70% of the funds brought by customers within 3 months migrate to the pockets of the owners of forex brokers. This profitability is no worse than the profitability of a casino, where customers are even more likely to win, as the figure below shows:
Source: www.rbcdaily.ru
Generally speaking, of course you need, no matter how casino it may seem. But you only need a real forex, where there is a real exchange of one currency for another. What for? For export-import operations, for investment and trading activities on a global scale such as carry trade, etc., for hedging risks, for making investments in currencies. However, these operations are excellently managed by banks that provide services to their clients in performing conversion operations. They make them both on the interbank over-the-counter market and on the currency exchanges.
Moreover, the liberalization of currency legislation in Russia allowed, from January 1, 2012, to participate in currency trading not only to authorized banks with a currency license, but also to other persons.
Moving in this direction, the leading stock exchange of the country, Moscow Exchange OJSC, opened in February 2012 two-level access for individuals to its foreign exchange market. Wherein:
It would seem that many issues of regulating this market and supervising those participants who wish to conduct real business and do real (and not feigned or aleatory) transactions are resolved.
So maybe we should move in this direction? Those forex brokers who really want to legalize should be licensed as real brokers and conduct business in a civilized manner, observing current legislation. It is time for others to ask: “and you, the citizens, in fact, what are you doing here?”
Author : Vladimir Tvardovsky, Chairman of the Board of ITinvest.
The nature of the FOREX market
FOREX is an abbreviation for two words Foreign Exchange, which means Currency Exchange. The same word Exchange in English refers to the exchange or any other trading platform where the Exchange of some assets to others takes place, for example, trading in stocks or futures contracts and futures options. From here comes the first misconception about the nature of this market.
')
Forex offices persistently call the game at exchange rates - either by trading on the stock exchange, or by investment. In reality, the lion’s share of the market for exchanging one currency for another takes place in the OUT-BIRD market between large international banks. This is a relatively "closed club", getting there is very difficult. Trade goes on very large sums. The minimum lot is the sum of 1 million dollars or euros, the standard - 5 or 10 million dollars.
Currency trading primarily ensures the export-import operations of bank customers, and secondly, but not least, the interests of their own trading and investment departments of international banks that conduct their investment activities around the world. It is clear that in order to become a client of an international bank and begin to buy and sell currency in order to extract "income" from the movement of currency rates, you need to deposit more than one million dollars.
In this case, trading will most likely be carried out without leverage and according to the quotes of the bank itself, and not of the free market. And the bank quotes will differ from those desired in the worst direction for the client. Well, it is natural: the bank, too, must earn! His traders will not work “for free”. From here follows the second and main misconception of people involved in forex trading. They think that their deals are really being brought to the market through a cunning system of “inter-broker relations”. However, it is not.
Most transactions in the real interbank market are made through a limited number of private information and dealing networks (for example, such well-known companies as Thomson-Reuters or Bloomberg), where the entrance from the street is simply ordered. Many networks do not have gateways that would allow external dealing systems to be connected to them in order to route client orders to the market. And “to drive” every client order into such a system is expensive and therefore not advisable.
Each transaction, which is made by currency dealers of banks through such systems, is then processed by the back office of the bank and on its third banking day it is calculated on the delivery or acceptance of the traded currency. It would be naive to believe that orders of customers of domestic forex brokers for 3-5-10 thousand dollars (and even 100 thousand) go to the real market. Nobody will either do such a small amount, neither confirm, nor process the transaction, nor make calculations on it. It is simply unprofitable.
Thus, it can be stated, and forex brokers are well aware that no transactions they enter into with clients are displayed on either the stock exchange or the interbank over-the-counter market. Where, then, are these deals executed? And who is the other side of such deals?
Where are the deals executed?
Many managers of forex brokers explain to clients a scheme of work like this:
The risk management system installed at the “firm” (registered on the BVI or the Cayman Islands) considers risks very well and sends not all client orders to the real over-the-counter market, but only their aggregate component that exceeds a certain size. And the company reduces the rest of the warrants with opposite orders received from other clients. Ie, if you have a warrant for 10 thousand dollars, it will be executed to you inside the forex broker, if it is 100 thousand dollars, it will be executed - by its counterpart, a large international bank, which will take this order for its position But if you have a $ 1 million order, then it will certainly be sent “to the exchange” and executed only there.
This, of course, is not true. No forex broker almost never takes out a “deal” of its clients to the open market, be it a mythical exchange or a partner — the counterparty — a large international bank or an over-the-counter market — because he knows that the conditions of the game are such that the client will lose sooner or later. Therefore, there is no need to bring transactions to the market.
And who in this case becomes the second party in transactions? Where to find a counterpart? You don’t need to go far - the forex broker itself is the other side of the deal.
Thus, having concluded a contract with a forex broker, bringing him money, the client will make transactions with the forex broker himself. In this case, any loss of the client is a gain of the forex broker, and any gain of the client is a loss of the forex broker. And he is the loser, just the least interested.
The next misconception that the forex brokers persistently try to implant in the heads of ordinary people is that you can make very good money on the movements of currency quotes. If only correctly guess the direction of the course. But is it?
Can I make money on Forex?
The standard example cited by employees of a forex broker is as follows. Consider the graph shown in the figure below, which shows the movement of the euro-dollar.
If the client sold on October 25, 2011, 1 million euros at the price of 1.390 EUR / USD, and on December 22 of that year bought the million at the price of 1.310 EUR / USD, as this is shown in the figure, then his profit would have amounted to 80 thousand dollars . Good money, isn't it? These $ 80,000 would be received on the $ 1,390,000 invested in the transaction, which in two incomplete months would yield a yield of 36% per annum. Not bad?
Yeah not bad. The trouble is that the average Russian investor does not have that kind of money. “It does not matter,” the forex broker replies to him: I will give you my shoulder !
You do not need to have a million in the account. All you need is $ 10,000. Then, with a leverage of 100, you can buy and sell lots in the amount of up to $ 1 million. And with a leverage of 150, up to one and a half million. ” So says forex broker. This means that if you have a leverage of 100, you must count the income not on the invested $ 1,390,000, but on an amount 100 times less !!! This, of course, increases the yield by 100 times and gives a fantastic 3,600% per annum !!! This is fantastic - anyone in the financial market will tell you. And he will be right.
What does the shoulder really mean?
Let's see what shoulder means in practice. The average daily fluctuation of prices for the euro-dollar currency pair is, according to the results of the last year's trading (from April 1, 2011 to March 29, 2012) 0.28%. This means that your investment of $ 1,390,000 daily experiences average cost fluctuations of about 4 thousand dollars, either plus or minus. This also means that approximately two and a half days of an average unfavorable movement for you in one direction is enough so that there is absolutely nothing left from the account of 10 thousand dollars. Your position will be closed, despite the fact that in the future you might be able to make a profit. These are the rules.
[ When the critical level of losses in an open position of the client is reached, the broker has the right to close it at the current market price by force. ]
In the case considered, when the client has an account of $ 10,000 and a leverage of 100, the exchange rate needs only to change by 0.01 (0.01 = 100 pips = 1 figure, 1% = 1 / leverage), i.e. from 1.390 to 1.400 so that your position will be forcibly liquidated by a forex broker and you will be left without money. With shoulder 50, the situation is somewhat better. Prices should change in an unfavorable direction no longer by 1%, but by 2% = 1/50, which is 200 pips or two figures, to put it in the terminology of currency speculators. However, even in this case, your position would be closed after only two days. The price movement for a figure or two is not a rare event in the forex market.
The fact that in the forex market with a leverage of more than 20 is almost impossible to earn, even correctly predicting the direction of the exchange rate in the medium and long term, unfortunately, there is a statistical fact that follows from a simple mathematical modeling of the exchange rate. At the same time it does not matter at all: do you suppose this movement of courses at the micro level to be fractal or purely Brownian.
The sadness of this fact stems from the randomness of the pricing process, on the one hand, and the limitations of your resources when working with leverage, on the other. In whatever direction you open a position when trading with leverage - sooner or later you will lose all your money. And no risk management, no money management saves from this disaster. The question can only be put this way: with what probability and for what time does the complete loss of all funds occur.
The more leverage - the greater the likelihood of loss and the less time needed to implement this adverse event.
A complete analogue of trading with leverage 2 on the foreign exchange market is playing at a casino at roulette. If you do not stop, then sooner or later there will be a sequence of events, when you lose all the money brought with you, as well as all the money earned before it, no matter what strategy you use.
According to materials posted on the RBC-Daily website and referring to Philadelphia Financial's research, Forex brokers clients lose their money at a rate of 60-80% per quarter.
Source: www.rbcdaily.ru
This means that about 70% of the funds brought by customers within 3 months migrate to the pockets of the owners of forex brokers. This profitability is no worse than the profitability of a casino, where customers are even more likely to win, as the figure below shows:
Source: www.rbcdaily.ru
Do you even need forex?
Generally speaking, of course you need, no matter how casino it may seem. But you only need a real forex, where there is a real exchange of one currency for another. What for? For export-import operations, for investment and trading activities on a global scale such as carry trade, etc., for hedging risks, for making investments in currencies. However, these operations are excellently managed by banks that provide services to their clients in performing conversion operations. They make them both on the interbank over-the-counter market and on the currency exchanges.
Moreover, the liberalization of currency legislation in Russia allowed, from January 1, 2012, to participate in currency trading not only to authorized banks with a currency license, but also to other persons.
Moving in this direction, the leading stock exchange of the country, Moscow Exchange OJSC, opened in February 2012 two-level access for individuals to its foreign exchange market. Wherein:
- Indeed, transactions are concluded for the purchase or sale of foreign currency either for rubles or for US dollars,
- the place of transaction is known - the stock exchange,
- the counterparty for each completed transaction is known - it is the central counterparty, i.e. the exchange itself, which rises between the buyer and the seller, and both parties guarantees the execution of the concluded transaction,
- the rights and obligations of each party to the transaction are known,
- known legal implications for each transaction concluded
- there is a clear procedure for the execution and execution of these transactions,
- and there are also well-defined rules for accounting for such transactions by stock brokers and settlements on them.
It would seem that many issues of regulating this market and supervising those participants who wish to conduct real business and do real (and not feigned or aleatory) transactions are resolved.
So maybe we should move in this direction? Those forex brokers who really want to legalize should be licensed as real brokers and conduct business in a civilized manner, observing current legislation. It is time for others to ask: “and you, the citizens, in fact, what are you doing here?”
Author : Vladimir Tvardovsky, Chairman of the Board of ITinvest.
Source: https://habr.com/ru/post/202526/
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