Forex is an international over-the-counter foreign exchange market. Billions of dollars in the equivalent of different currencies circulate there every day. It is a closed system, so if someone makes money on price differences, someone else loses money on it.
Participants of the Forex market
- Traders. Individuals, management companies, investment funds. All of them buy and sell currency online, making money on exchange rate differences.
- Brokers. Intermediaries between traders and ECN-systems (platforms which serve the Forex market). They provide technical conditions for transmission of traders’ applications to the market, processing of applications, for which they receive a commission. However, there is a category of brokers, which only speak about placing of trader’s applications (orders) at the Forex market, but overlap the counter client’s applications inside their system.
- Liquidity providers. They are often market makers (those who with a big capital can move the price in the necessary direction). Exchanges, investment banks – they are ready to provide liquidity (the necessary volume of currency for an instant transaction). They often act as the second side of the deal with private traders.
- ECN-systems. Integral, Currenex. These are virtual platforms where requests are processed. In simple words: here they receive traders’ requests to buy/sell currencies, offers of liquidity providers to buy/sell large volumes of assets. All requests are processed and sorted here.
How does Forex work?
- A person, interested in making money on Forex, opens an account at the broker, makes a deposit, installs the trading terminal (platform) and turns into a potential trader.
- In the platform the trader analyzes the price movement of the currency pair/shares/oil and makes a decision: to sell or to buy. He places the corresponding request (order) to the broker to buy/sell the currency at the current price and specifies the amount of currency to be purchased.
- The broker sends the order to the ECN-system. It takes several milliseconds to find the response request. If there is one, the trader’s request is satisfied. If the price has changed and no one is ready to satisfy it, the broker sends the trader a new offer with new quotations.
Forex is a market. You sell, you buy, you make or lose. The broker is the intermediary, you are the Brain, market makers are your competitors, ECN systems are the market where you pay a commission for being in it. If you are looking for a reliable broker, you need to research this list here.