What is forex trading?

What is Forex?

Forex or FX, short for FOReign EXchange is the global market where one currency is exchanged for another. To put it simply, when you travel from one country to another and need to change your country currency to that of the country you are travelling to, that exchange is done in the Forex market.

Another major use of the Forex market is when you buy an item from another country; either you or the seller from whom you are buying is using the Forex market to exchange currencies. As evidenced by the above two examples, sometimes without realising it, hundreds of millions of people are using the Forex market every day for convenience purposes. There are also tens of millions who take advantage of the fluctuation created in the Forex market to make a profit.

The Forex Market

What is forex trading?

The Forex market is the largest financial market in the world, turning a gargantuous daily volume of around $5.1 trillion, followed by the stock market that ‘only’ turn around $212 billion worldwide! The amount of volume traded every day on the Forex market makes it one of the fastest, most liquid and most volatile financial markets to trade.

Unlike shares and commodities, forex trading does not take place in a physical financial market but directly between two parties; the buyer and the seller, in an over the counter market. These transactions are run by a global network of banks spreading across four major Forex trading centres in four different time zones, namely New York, London, Sydney and Tokyo. For this reason, the forex market is accessible to traders 24 hours a day during the week.

Trading in the Forex market

Trading in the Forex market

For the purpose of this tutorial and in line with the aim of this course, we are only going to focus on trading in the Forex market to make a profit.

The basic idea behind trading in the Forex market is the same as in any other financial markets; that is, traders buy or sell currencies according to their prediction of whether its value is going to increase or decrease. You buy a currency whose value you think is going to increase and sell a currency whose value you think is going to decrease.

However, the major difference trading in the Forex market is that the value of the currency is always in relation to another currency. That is why Forex instruments are always quoted in pairs, namely, currency pairs. They are divided into three categories, majors, minors and exotics. Majors are the currency pairs that are most frequently traded like the EUR/USD, GBP/USD, USD/JPY, AUD/ USD, USD/CHF, NZD/USD, USD/CAD. Minors are currency pairs that include the most traded currencies apart from the US dollar, such as the EUR/GBP, EUR/AUD, GBP/JPY, CHF/JPY, NZD/JPY, and GBP/CAD. Finally, exotics are currency pairs that include one major global currency and the other a currency from a developing country. Some common examples are EUR/TRY, USD/HKD, JPY/NOK, NZD/SGD, GBP/ZAR and AUD/MXN.

How to trade the Forex Market

In a currency pair, the first one is called the base currency while the second is called the quote currency. In the EUR/USD currency pair, for example, the EUR is the base currency and the USD is the quote currency. If the EUR/USD is trading at 1.12004, it means that 1 EUR is worth 1.12004 USD. If a trader thinks that the value of the Euro is going to increase against the US dollar, he will buy the pair (going long) and if he thinks that the price of the Euro is going to decrease against the US dollar, he will sell the pair (going short).