Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade. The Forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.
All the world’s combined stock markets don’t even come close to this. But what does that mean to you? Take a closer look at Forex trading and you may find some exciting trading opportunities unavailable with other investments…!
If you’ve ever traveled overseas, you’ve made a Forex transaction. When you do this, the exchange rate between the two currencies based on supply and demand determines how many euros you get for your pounds. And the exchange rate fluctuates continuously.
A large international company may need to pay overseas employees. Imagine what that could do to the bottom line if, like in the example above, simply exchanging one currency for another costs you more depending on when you do it? These few pennies add up quickly.
In both cases, you as a traveler or a business owner may want to hold your money until the exchange rate is more favorable..!
You can trade currency based on what you think its value is (or where it’s headed). But the big difference with Forex is that you can trade up or down just as easily. If you think a currency will increase in value, you can buy it…
If you think it will decrease, you can sell it. With a market this large, finding a buyer when you’re selling and a seller when you’re buying is much easier than in other markets. Maybe you hear on the news that China is devaluing its currency to draw more foreign business into its country.
If you think that trend will continue, you could make a forex trade by selling the Chinese currency against another currency, say, the US dollar.
HOW TO BUY AND SELL CURRENCY
All forex trades involve two currencies because you’re betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter.
When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price and one is the sell.
The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair…!
TRADING ON MARGIN
When you trade forex, you’re effectively borrowing the first currency in the pair to buy or sell the second currency.
With a US$5-trillion-a-day market, the liquidity is so deep that liquidity providers—the big banks, basically—allow you to trade with leverage. To trade with leverage, you simply set aside the required margin for your trade size.
If you’re trading 200:1 leverage, for example, you can trade $2,000 in the market while only setting aside $10 in margin in your trading account. This gives you much more exposure, while keeping your capital investment down…!