**Understanding How Forex Really Works: A Deep Dive into Currency Trading**
*Based on the video by Nick Shawn: “How Forex Really Works (And Why You May Never Make Money)”*
The Foreign Exchange Market, also known as Forex or FX, is often portrayed as an exciting opportunity for individuals to make money by trading international currencies. However, the reality of Forex trading, especially for beginners, is often quite different from expectations set by social media, advertisements, and even many online educators. In his video “How Forex Really Works (And Why You May Never Make Money),” Nick Shawn breaks down the inner workings of the Forex market, how most traders are led down the wrong path, and what it actually takes to succeed.
This article explores the key points from the video while supplementing it with additional research and context so you can better understand the true nature of Forex trading.
## What Is Forex Trading?
Forex, short for “foreign exchange,” is the global marketplace for buying and selling currencies. It is the largest and most liquid financial market in the world, with an average daily trading volume exceeding $7.5 trillion according to the Bank for International Settlements (2022).
Currencies are traded in pairs, such as:
– EUR/USD (Euro/US Dollar)
– GBP/JPY (British Pound/Japanese Yen)
– USD/CHF (US Dollar/Swiss Franc)
These pairs fluctuate based on economic, political, and technical factors, offering opportunities for profit. However, volatility also introduces high risk.
## The Common Misconception: Forex Is a Get-Rich-Quick Scheme
Nick Shawn emphasizes that one of the biggest traps new traders fall into is the belief that Forex is a way to get rich quickly. Many retail traders are lured in by:
– Flashy social media accounts showing luxurious lifestyles
– Unrealistic trading signals or bots claiming guaranteed profits
– Online “Forex courses” that often oversell simple systems or indicators
The truth is far more sobering. Most retail traders lose money. In fact, various studies and broker disclosures show that over 70% to 90% of retail Forex traders lose money over time.
## How Forex Really Works
To truly understand Forex, we need to appreciate the structural dynamics of the market.
### 1. The Market Is Not a Centralized Exchange
Unlike stock markets like the NYSE, the Forex market is decentralized. This means there is no single location or exchange where all transactions occur. Instead, trading happens through a network of banks, brokers, financial institutions, and individual traders.
The main players in the Forex market include:
– Central banks
– Commercial banks
– Hedge funds
– Institutional investors
– Large multinational corporations
– Retail traders (with relatively small volumes)
The liquidity and pricing are affected by this hierarchy. Retail traders operate at the bottom of this ecosystem, with limited influence on actual price movements.
### 2. The Role of Market Makers and Brokers
Most retail traders use brokers to access the Forex market. Brokers can act as:
– STP (Straight Through Processing) or ECN (Electronic Communications Network) facilitators who route trades directly to the liquidity providers
– Market makers who take the opposite side of their clients’ trades
Market makers operate by providing liquidity and “making the market” for retail orders. This setup can involve a conflict of interest, as they may profit directly from client losses. However, credible regulators monitor broker activities tightly to prevent abuse.
### 3. Spread and Commission: How Brokers Earn
Every time you place a trade, your broker makes money regardless of whether you win or lose. They do this via:
– Spreads: The difference between the bid and ask price
– Commissions: A small charge per trade or per pip
Even trades that are “break-even” technically result in a small loss due to these fees. Over time, these costs add up and significantly affect profitability.
### 4. Liquidity Providers and Smart Money
Read more on USD/CAD trading.