What Is Forex?
The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. 
Why Forex Traders Need a Business Plan

Why Forex Traders Need a Business Plan ?
(Just Like Any Business)

Forex trading can be a great way to make money. However, it requires a substantial commitment of both time and resources. Some of the costs of getting into Forex trading include:
  • Broker commissions and fees.
  • Sophisticated computers.
  • Advanced software that can perform detailed analysis.
  • Research services.
  • Losing money on bad trades (this is inevitable I am afraid).
The foreign exchange market is the largest market in the world. More than $200 billion worth of trades are conducted every day, which means that traders have a substantial opportunity to make a lot of money.

However, Forex trading is also very risky. It is a zero-sum game. This means that every dollar one player wins will be a dollar another player lost. Forex traders will either win big or lose big. You also need to keep in mind that when you are trading on the Forex market you are betting against some of the biggest sharks in the financial world. You definitely need to know what you are dong if you are going to operate a Forex trading business.

Tips for Running Your Forex Business
The most important thing to keep in mind when you are trading Forex is that you are running a business. You can't treat it like a hobby if you want to succeed. Make sure you have a detailed business strategy as you work the markets. I have outlined a couple key things to keep in mind here.

Revenue Model
First of all, you need to know how you will be making money on Forex. You will calculate your profit the same way you would with any other financial investment. Your profit will be the sum of your winnings minus the sum of your losses.

You probably already knew that, so let me tell you something a little more informative. The mistake many people make is assuming that they are going to need to win more often than they lose. That tends to be more the exception that the rule.

Some of the best traders have struck it rich with Forex trading by winning less than 40% of the time. However, other people have taken less risk and still don't win often enough to realize a net profit. The trick is to take smart, healthy risks that will yield high returns that outweigh your risks. You will need to have an organized approach to win as a Forex trader.

Common Forex Trading Mistakes
As I said, Forex is a zero-sum game. In the long-run there are more losers than winners, but the winners tend to make a lot more money. That's because they know how to operate a serious business.

Here are some of the biggest reasons Forex traders lose money:

  • They make their trades on emotions.
  • They don't have a system they are willing to commit to.
  • They don't understand how to use risk to their advantage.
  • They don't learn how Forex markets work or how to trade effectively.These mistakes have cost traders a considerable amount of money. Many financial institutions have also lost money with traders who have made these mistakes. Many banks now require people to have a business plan before they will even allow them to open an account.
Remember, as a Forex trader you will be competing with seasoned traders all over the world. Most of them are trading full-time. You will need to make the same commitment and take the same risks if you hope to beat them.

You need to take the time to develop an optimized system. You will need to implement your strategy consistently if you intend to make money with Forex. You will be better off having a good strategy that you use consistently than having a great strategy that you never implement.
Advantages of the Forex Market

There are several Advantages of the Forex market over some other types of financial trading.

When talking about various investments that are accessible to almost everyone, there is one type that springs to mind. The Forex or foreign exchange market has many advantages over other types of tradin. Since it is an OTC (over-the-counter) market, the Forex market is open 24 hours a day, unlike the regular stock or commodity markets. Most investments require a significant amount of money before you can take advantage of that investment opportunity. You only need a small amount of capital to trade Forex. Everyone can enter the market with as little as $1 to trade a "micro account", which allows you to open positions of 1,000 units. One lot of 1,000 units of currency is equal to 1 contract in micro account. Each "pip" or "tick" (smallest currency rate movement up or down) is worth $0.10 profit or loss, depending on wheather you are going with the market or against it. A Forex mini account gives you control over 10,000 units of currency, where one pip is worth $1.00. While a standard account gives you control over 100,000 units of currency, and a pip here is usually worth $10.00.

Forex is also one of the most liquid markets. When trading currencies on the spot Forex market you have full control of your capital, meaning that you can buy and sell your positions anytime during market open period. This is a definite advantage because, if you need to use your account money, it can be accessed immediately without additional commission or waiting periods. Many other types of investments require holding your money up for rather long periods of time.

Also, in Forex, with a small amount of money, you can control bigger market positions using the leverage or margin trading. Leverage of 1:100 is common in the Fore market. It allows you to control amounts 100 times bigger than your capital, while leverage of 1:500 and 1:1000 can be found with some offshore companies.

Forex traders can be profitable in bullish or bearish market conditions. Stock market traders need stock prices to rise in order to take a profit, since short-selling is a subject to strict limits in stock exchanges. Forex traders can make a profit during both uptrends and downtrends. Forex trading is rightfully considered risky but with a good trading system to follow, good money management skills, and some level of self-discipline, the risks of Forex trading can be minimized considerably.

The Forex market can be traded anytime and anywhere. As long as you have access to a computer and internet, you have the ability to trade the Forex market. An important thing to remember before jumping into trading currencies is that it is worth practicing with "paper money", or "fake money", on the demo account. Most foreign exchange brokers have demo accounts where you can download their trading platform and practice in real-time with real market data but with "virtual money". While profitable demo trading cannot guarantee your success with real money, practicing can give you a huge advantage to become better prepared when you start trading with your real, hard-earned money.
The Bank of England, established in 1694
The Bank of England, established in 1694

Prior to the 17th century most money was commodity money, typically gold or silver. However, promises to pay were widely circulated and accepted as value at least five hundred years earlier in both Europe and Asia. The Song Dynasty was the first to issue generally circulating paper currency, while the Yuan Dynasty was the first to use notes as the predominant circulating medium. In 1455, in an effort to control inflation, the succeeding Ming Dynasty ended the use of paper money and closed much of Chinese trade. The medieval European Knights Templar ran an early prototype of a central banking system, as their promises to pay were widely respected, and many regard their activities as having laid the basis for the modern banking system.

As the first public bank to "offer accounts not directly convertible to coin", the Bank of Amsterdam established in 1609 is considered to be the precursor to modern central banks. The central bank of Sweden ("Sveriges Riksbank" or simply "Riksbanken") was founded in Stockholm from the remains of the failed bank Stockholms Banco in 1664 and answered to the parliament ("Riksdag of the Estates") thus making it the oldest central bank still operating today. One role of the Swedish central bank was lending to the government, which was likewise true of the Bank of England, created in 1694 by Scottish businessman William Paterson in the City of London at the request of the English government to help pay for a war. The War of the Second Coalition led to the creation of the Banque de France in 1800.

Although central banks today are generally associated with fiat money, the 19th and early 20th centuries central banks in most of Europe and Japan developed under the international gold standard, elsewhere free banking or currency boards were more usual at this time. Problems with collapses of banks during downturns, however, were leading to wider support for central banks in those nations which did not as yet possess them, most notably in Australia.

The US Federal Reserve was created by the U.S. Congress through the passing of The Federal Reserve Act in the Senate and its signing by President Woodrow Wilson on the same day, December 23, 1913. Australia established its first central bank in 1920, Colombia in 1923, Mexico and Chile in 1925 and Canada and New Zealand in the aftermath of the Great Depression in 1934. By 1935, the only significant independent nation that did not possess a central bank was Brazil, which subsequently developed a precursor thereto in 1945 and the present central bank twenty years later. Having gained independence, African and Asian countries also established central banks or monetary unions.

The People's Bank of China evolved its role as a central bank starting in about 1979 with the introduction of market reforms, which accelerated in 1989 when the country adopted a generally capitalist approach to its export economy. Evolving further partly in response to the European Central Bank, the People's Bank of China has by 2000 become a modern central bank. The most recent bank model, was introduced together with the euro, involves coordination of the European national banks, which continue to manage their respective economies separately in all respects other than currency exchange and base interest rates.

Long EUR/JPY@103.80. Stop at 103.00. Take profit 105.30

US stocks showed a key reversal pattern last Friday ( Positive Hammer) on the back of falling concern of a fiscal cliff thanks to a comment (BOEHNER SAYS MEETING WITH PRESIDENT WAS CONSTRUCTIVE, OUTLINED A FRAMEWORK FOR TAXES, SPENDING). Risk-sentiment looks to be improving ( our gram+ is now at risk-neutral out of risk-averse today). I am likely to make use of this timing as a chance to go long X.JPY as RISK ON trade & I prefer long EUR/JPY from here as it looks to be lagging other X/JPY. AUD/USD/CAD outperforming by one.5% vs EUR outperforming by 0.3% against JPY this month. They have the Eurogroup meeting to speak about bailout money to Greece later today, so I place my cease at a bit far away than usual in preparation for headline risks around the meeting. In addition, USD/JPY market isn�t longer than yesterday as the market had expected some dips to 80�s through the BoJ meeting & trimmed some longs, so I think the topside is lighter than before. EUR/JPY is breaking one.5 y downtrend, the next level will be 105.30 ( 38.2% fibo).

Hedge funds as speculators

Hedge funds as speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Originally hedge funds started as a way to control market risk. Most speculators agree it is almost impossible to guess where the markets will go tomorrow.
Successful speculators would probably agree. there are a million ways to make money in the markets,  all of them short lived and hard to find.
Once upon a time money managers decided to hedge their risks, buy companies they liked and fade (sell short) companies they didn't. This theoretically allowed them to make a profit and avoid loss regardless of market direction.
Hedge funds were touted as a wealth defense. Very few true hedge funds were created and survived. Hedge funds started drifting toward bias hedeges, a bias toward one side of the market or a bias hedge by asset class.
Foreign exchange fixing

Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the market. Banks, dealers and traders use fixing rates as a trend indicator.

The mere expectation or rumor of a central bank foreign exchange intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime.

Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Asia.
Commercial companies

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 39% of all transactions. From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size”. Central banks also participate in the foreign exchange market to align currencies to their economic needs.