What is Forex Trading?

April 22, 2014

What is Forex Trading? | Vantage FX

What Is Forex Trading?

Forex trading is the practice of trading currency on the Foreign Exchange Market. The Foreign Exchange market is a decentralised market and is also known as the ‘Forex’, ‘FX’, ‘Spot FX’ or ‘Currency’ market. The Forex market is easily the largest financial market in the world with a volume of over $4 trillion a day. This easily trumps the daily volume $25 billion a day from the New York Stock Exchange. In fact, the daily traded Forex volume is three times more than the total amount of stocks and futures markets combined! With such wealth and depth of trading volume, it is a vast marketplace with great liquidity and universal appeal. Crossing several borders and time zones also allows for 24 hour trading during the week.

What exactly is being traded on the Forex Market?

A straightforward answer would simply be currency. Currencies such as the US dollar or the Japanese Yen are the common types of currencies traded. To trade in the Forex market, a simultaneous buy and sell is made – a buying of one currency whilst selling another. The simultaneous actions across the currencies make for them being referred to as a pair.

For example the Australian dollar against the US dollar is referred to as the AUD/USD pair or the Euro versus the Japanese Yen would be the EUR/JPY. Some of you may find this type of trading confusing as nothing physical or tangible has been purchased or sold. A different way to think about trading currency is to imagine yourself buying currency to buy a share in a particular country. For example, imagine you are buying the British Pound, which equates to you buying a share in the British economy. The price you purchased the Pound at is a direct reflection of what the market thinks of the current and future health of their economy.

It’s helpful to compare Forex trading to investing in the stock market: you don’t have to have a lot of money to trade currencies nor are you making physical purchases. With the rise of the Internet and smaller financial services providers, like MXT Global, bringing you into this $4 trillion daily market has been a whole lot easier. 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 will slowly and gradually spread your wings a little.

How is Money made in Forex trading?

Forex trading is dependent on the fluctuations in the exchange rates between pairs. It is based on the relative worth of each currency and their respective economies. Fluctuations occur frequently and quickly between the pairs and their exchange rates. It is these gaps of change where one can profit from. This is best seen via example. Have a look at the one below:

  • It costs 1.400 USD to buy 1 Euro. The exchange rate would be USD/EUR is 1.400/1.
  • You purchase €1000 for $1400 USD
  • The exchange rate then changes to 1.420/1
  • You sell your Euros back at the new rate of 1.420. (1000 x 1.420 = 1420)
  • 1420 – 1400 = $20. You make a profit of $20 USD.

$20 may not seem like a large sum of money – however, if you were trade with several thousand instead, the profit would exponentially be much larger. It is quite possible to do several smaller trades like the one above and frequently as the Forex market is open 24 hours a day and with the help of trading software. Nevertheless, before rushing off into trading, there are still some basics and skills to be learned.

Get started with the next section, Basic Forex Principles, and soon enough you’ll be ready to fly off into the money markets.

Lesson Two: Basic Forex Principles »

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