Simple Explanation of Forex

If you’re new to forex and want to understand how it works, here is the simplest explanation I could find.

If you want to forecast exchange rates, you need to somehow predict how much person C wants the currency. It’s not an easy task.

Struth. And I thought it was just the big 12 balancing inventry. Thks for saving us bro.

Its a task that no private retail trader can accomplish single-handedly. Perhaps too big for any bank or even a government economics department or central bank. Its so complex that the individual should not attempt it: whatever answer they come up with will have a very low level of accuracy if right and a very high risk of being totally incorrect.

But trading isn’t about prediction, its about reaction.

…I agree with Tommor and Bob…

All we can do is place our bets, limit losses, and repeat enough times that probability skews the win ratio in our favour. . . There is no magic formula . . .

I don’t normally poke my nose into forex discussions here on BP, but I thought I might add a few considerations on this matter, if it helps at all.

Note that the quotation [I]specifically [/I]refers to import/export and not to the forex market as a whole or to forex trading. What is described here is a very simple foreign exchange transaction, not the forex market nor how to trade it. It is not only extremely over-simplified, it is also inaccurate.

In practice, the bank does not “go to the FX market” it is itself [I]part of [/I]the forex market. Practically all banks are market-makers and quote both a bid and an offer price. All these banks, financial institutions, and companies make up the interbank market where huge amounts of currencies are changing hands all day long. The participants range from the small highstreet currency shop where you can buy and return your holiday cash, to the large banks quoting tight spreads and trading all day and passing positions around the globe. Then there are large multinationals that deal in so many currencies that they can almost function as a bank themselves. In addition there are huge pension and investment funds that are constantly shifting money around from place to place trying to optimise their return on investment.

  • when you buy something from E-Bay or Amazon, for example, or plan your foreign holidays, the current exchange rate is not that critical in making your decision. The range of cost tolerance when converted to your own currency is quite wide. The key deciding factor is more your desire for the product than the exchange rate.

  • then there are the import/export companies. This is a huge market. But the participants are not really forex speculators, they are dealers in products and commodities. Their aim is to sell products and make a mark-up profit. They know at what price they can sell their products in their markets and they know the cost prices at which they can acquire their products - it is therefore relatively easy to simply calculate at which minimum exchange rate the trade will “work” for them.

  • then there are the companies acquiring or expanding into foreign markets and needing to borrow large amounts of capital in foreign currencies over a long period of time. Both the companies and their bankers need to calculate the optimal exchange rates and interest rate levels when planning their expansions.

  • then there are those huge funds. They need to assess which investments offer the greatest return, whilst considering exchange rate movements and risk profiles.

  • then there are the governments and central banks implementing their monetary and fiscal policies in order to achieve their targetted rates in foreign exchange, interest rates, inflation, and so on.

  • and then there is me and you. The miniscule participants that don’t matter at all, or impact in any way on the market, who are just trying to guess which way all the above factors are likely to collectively move the market, and when, and by how much, and how to decide when we are wrong…

All these inputs affect the market in many ways and in different time frames ranging from instant to many years. In addition, foreign exchange is not an issue of absolute values. The value of each currency is a multitude of relative values with respect to all other currencies. When you buy one currency you are selling another. A specific currency may well be strengthening against one currency but simultaneously weakening against another.

So…as you concluded: [I]“It’s not an easy task”![/I] :smiley:

The simple answer to the question is:

FOREX is betting against two fighters (currency pairs), based on their past performances and life events (News).

We are the spectators (speculators) and our funds is what fuels the FEUD

I hope this helps

Nice summary Manxx.

Manxx, yours must be the best definition of foreign exchange participation I have ever read on these forums.

Thank you!!!

Manxx’s demonstration of the complexity of the markets is also confirmed during a series of 3 documentaries (which are available on youtube) called ‘Masters of Money’, profiling John Maynard Keynes, Friedrich Hayek and Karl Marx.

In the Friedrich Hayek episode, there is an interview with Mervyn King, the previous governor of the Bank of England, who said:

“Many of the computer models have been desperately misleading in pretending that we know how the economy works. We don’t. We can’t forecast the economy”.


This topic was really helpful for me to understand how does the Forex Market work.

Hey Manxx,

Sorry to bother you, I’m new to the site and to trading currency, I was just wondering if you could recommend and good trading platform to use on a mac? Ive tried things like cTrader and Investopedia demo but I really just want to get going now and any help or tips would be appreciated. Also I’m aware I’m more than likely in the wrong conversation here so sorry about that, thanks

When you choose a broker, they will offer you pc and mac versions
Pick a regulated broker, not just the cheapest

Hi Macca,
CarlosRay has answered your question above :slight_smile:

The selection of the most appropriate broker is the more important issue and you will then use one of the platform options offered by that broker. Most brokers will offer at least MT4 and a mobile platform, and others will also offer a proprietary platform of their own. Some brokers offer agreements whereby you can link your trading account to more advanced 3rd party platforms such as NinjaTrader.

MT4 is perhaps the most widely used platform and offers the rather dubious “advantage” of a huge range of importable customised indicators, methods, EA’s, etc. Personally, I find it rather clumsy and not very user-friendly, but it seems to be stable and reliable ( I don’t use it very much).

The risk with MT4 is getting drawn into the seductive array of custom indicators and systems. Enough to try a new one every day!:). But it is important [I]not [/I]to consider indicators as a substitute for reading and understanding your market thoroughly yourself. They should be used to verify your [I]own [/I]thoughts and assist in timing your entries and identifying suitable exit points. You do not need many (some will say “any”) indicators to trade successfully.

It is too easy to lean of indicators as a somewhat sub-conscious method of transferring/delegating decision-making to a “third party”, i.e. a method designed by someone else who presumably was successful with it! And we hear ourselves saying, [I]“the system” told me to buy "[/I] and then [I]“it was the sytem’s fault that I lost”[/I], but the responsibility lies 100% with you, the trader.

Use your plaform features sparingly and with a thorough understanding of what they are actually based on and therefore actually telling you. Many traders put 99% of their effort into finding a “method” that “works” for them and only 1% on developing their own skills in reading and understanding their market, evaluating trade potentials, controlling risk exposure and money management. These percentages should be entirely the other way round!

I cannot say anything about PC v mac versions (which is what you actually asked about! :smiley: ) as I have never used a mac. But I am sure that CarlosRay is right that brokers will offer both versions which are equally suitable, at least as far as the platform itself is concerned.