What is Forex Trading

The Foreign Exchange market or the Forex market or, at times, referred just as FX is one of the largest and most liquid markets in the world. According to the Bank of International Settlements, the Forex market trades in a daily average volume of around $5 trillion. This was back in the year 2016, but it has been growing ever since and given its nature, will continue to rise in the future. When you combine the trading volume of the world’s stock exchanges, it would not even come close to that of Forex.

When trading in Forex, it is the simultaneous buying and selling of one currency for another with the trades being carried out 24 hours a day and five days a week. 

The reason for the popularity of Forex is quite simple as it supports economic growth that corporations and governments around the world aim for. And to achieve that, international trade will always be of top priority for them. 

Forex is a decentralized or over-the-counter market (OTC) market which means that there is no central exchange where currencies are exchanged in contrast to stock markets where there are exchanges to buy and sell shares in companies. 

Trading in the foreign exchange market

Whether you were aware of it or not, chances are you have participated in Forex. This is especially so when you have traveled to another country and exchanged your home currency for the local one. This exchange is basically how the Forex market works.

So, put, trading in Forex is the buying and selling of currencies in an attempt to profit off of the changes in their exchange rates.

This trade is always done in pairs; with a base currency on the left side and a quote currency on the other. An example of this would be the USD/EUR currency pair; where USD stands for the US Dollar and EUR for the Euro. If you were to buy the USD/EUR currency pair, you would get the Dollar in exchange for the Euro, and if you sold USD/EUR, you would give the Dollar in exchange for the Euro. 

You may be familiar with money exchange booths in airports or on the high street. However, most Forex trading is done through a specialist Forex broker online; usually through a trading platform. Since it takes place online, trade executions can be done lightning fast, which can allow traders to enter and exit the market quickly to take advantage of even the smallest price movement. With the Forex broker’s trading platform, traders can also trade on more competitive pricing and use leverage in their transactions. 

Forex trading platforms

Forex trading platforms, depending on the broker, make it easy for traders to buy and sell currencies as they are designed to do all the calculations for you; including your profits and losses. 

A basic strategy for Forex traders when attempting to profit off of trading is to buy the currency pair if they speculate the price of the base currency was to go up and sell the currency pair if they think the cost of the base currency were to go down.

When trading in Forex, it is essential to ask yourself where you think the price would go next, how far the prices’ direction would go, how much you would be willing to risk, and how long would you wait for more favorable rates.

While making guesses isn’t an adequate start, it is much advised to take advantage of the many tools and techniques available to help you analyze currency markets to make logical and well-informed decisions.

Profiting from trading Forex

To explain how profits are made when trading Forex, a simple example will be required.

In this scenario, let’s say that the currency pair chosen would be the EUR/USD pair with an exchange rate of 1.30000

The reason why currencies in trading platforms are quoted to 5 decimal places is to give a more precise rate of exchange as the smallest movement of prices can mean significant profits or losses depending on how much you exchange.

Anyways, in this example, it would mean that 1 Euro buys 1.3000 US Dollars or vice versa.

Exchanging or selling 1,000 Euros would give you 1,300 Dollars, and if you sell 1,300 Dollars, you get 1,000 Euros.

If the currency pair’s exchange rate were to change to 1.28000, you could buy less US Dollars for 1 Euro, or you can buy more Euros for less US Dollars.

This means that if you sold 1,000 Euros to buy 1,300 US Dollars previously, you could exchange the US Dollar back to Euros and make a profit.

Since in this scenario, you would receive more Euros than what you started with. If the exchange rate were to go the other way with 0.2 US Dollar to 1.32000, the deal would be a loss should you exchange the pair back to Euros and close the position.

Of course, this action of buying and selling is all up to you and while you won’t be able to predict what the exchange rates would be over time, researching market trends and geopolitical events along with making use of analysis tools can go a long way in helping you in getting a long and successful career as a Forex trader.