Lesson 1: What Is Forex?

  • 1 Nov 2017

What is Forex?

 

The world of Forex trading may be daunting to a complete beginner, but when you break things down, it’s not so difficult to grasp.

 

Firstly, what is Forex?

Forex stands for Foreign Exchange, and it refers to the massive Foreign Exchange Market that transacts up to 5 trillion dollars a day.

 

Exchanges and speculations in the Forex market are simply putting one currency vs another.

 

Who are the big players in the Forex market?

They are the banks, institutions, business owners, market speculators and even governments.

 

Years ago, Forex trading was a privilege only the big banks and financial institutions could take advantage of, but with the boom of the internet in the past 20 years, Forex has expanded greatly. The rise of Forex has led to a very low cost of trading environment compared to other financial markets.  With just a hundred dollars, traders can open an account and start investing!

 

However, just because it’s easy to start trading Forex, doesn’t mean you should jump in with both feet. Understanding risk and getting the right education is vital to your success. If you’re willing to put in the time and effort you too can learn how to trade profitably. The next step is to choose a reliable, regulated Forex broker to process your orders.

 

Most people have actually traded Forex without realising it. If you’ve ever gone for an overseas trip, you’ve made a currency exchange. By selling one currency and buying another, you’ve participated in the 5 trillion dollar Forex market!

 

The Forex market is used in many different ways for different purposes. Consider a business that imports and exports goods internationally. They need to make payments to suppliers using different currencies, so a big portion of the daily Forex transaction volume comprises of businesses making global currency payments.

 

Besides businesses, Governments and Central Banks get in on the action too, by buying, selling and diversifying their currency portfolios to safeguard themselves against global economic conditions. However, the largest volume of transactions that take place in the Forex market every day come from speculators. Speculators are those who electronically buy and sell currencies in pursuit of profit. They are able to earn profit from correctly predicting when a currency may rise or fall in the future.

When you trade in the currency market, you will be putting one currency against another. Try to recall an overseas trip you took; you sold one currency and bought another. This transaction is what the Forex market calls a ‘pair’, for example, if you had sold US Dollars and bought Thai Baht. Speculators can include anyone around the world. They could be hedge funds, banks, business or even you. As long as someone thinks they know the direction the currency is going, they may be interested in taking a position.

Before the internet was born, traders actually needed to go to a bank to make all their transactions. Now, the Forex market is open 24 hours a day, five and half days a week.

 

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