Forex Explained

What Is Forex Trading?

The Foreign Exchange market, also referred to as the "FOREX" or "FX" or "Spot FX" is the largest financial market in the world, with a volume of over $4 trillion a day. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is. It actually equates to more than three times the total amount of the stocks and futures markets combined! The point of Forex is a big mean money moving machine.


What Is Traded On The Foreign Exchange Market?

The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker, and are traded in pairs; for example the British pound and the US dollar (GBP/USD) or the Euro and the Japanese Yen (EUR/JPY).

Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

Its helpful to compare Foreign Exchange (Forex) trading to investing in the stock market: you don't have to have a lot of money to trade currencies, at least not any more. With rise of the Internet, little guys like us can trade currency much the same way that we can invest small amounts of money in the stock market.

Although it may seem quite complicated – and there are a lot of factors that enter into trading currencies – you can easily get started and slowly feel your way along. Then, as you get more experience, you can be more adventerous with your trades.


How To Make Money In Forex

Forex trading is based on the strength of various currencies in relation to each other, or their relative worth. For example, it might take 1.400 US Dollars to buy one Euro. This is the exchange rate and all major and almost every other currency have published exchange rates. Here’s the interesting part, though, and where the opportunity to make money lies. These rates fluctuate all the time, usually by very small amounts. That means that if you buy 1,000 Euros for 1,400 dollars (the above exchange rate) and the exchange rate then changes to 1.420 dollars to buy 1 Euro, you can sell your Euros back for 1.420 dollars, realising a profit of $20.

Now that's not a huge amount of money, but if you are working with more than a thousand dollars you can do very well for yourself because you can make as many trades as you want whenever you want. Forex is a 24-hour, 7-day a week market.

But before you rush into trading with dreams of making millions you need to learn the basics and then start out cautiously. But there’s no reason why you can’t make money in this exciting, fast-moving market.

Read onto the next section Basic Forex Principles, and soon you’ll be ready to start trading.