What Is Forex and How Does It Work
In a simple term, Forex is a global, international or intercontinental money exchange market. In a Forex market participant or traders trade off currencies, yes they sell and buy currencies.
It is decentralized system where traders come to trade of currencies of different nations across the globe.
Imagine leaving one country to another country. Ever thought of how people get to spend their own country’s currency in a different country where they spend entirely different currency.
An Example Of Forex
Let me give you a quick example to help you understand what Forex really is. When you travel, there is always a currency exchange booth in every airport waiting to help you trade of your money
They help you exchange the money you have in your wallet to the money they spend in the country you are visiting. Or when you go to banks you see around the premises boards displaying different country’s currency exchange rate.
Immediately you exchange your country’s currency to the visiting country, you have simply participated in the Forex global exchange.
What happens at that point where you exchange your country’s currency to the visiting country is simply buying and selling of currency. You sell your currency to buy their currency because you cannot make financial transactions in the visiting country with your country’s currency.
How do people make money from this simple methodology I just explained up there. Read carefully along with me as I show you everything from trading to making profit in one easy step.
This kind of exchange happens globally almost every minute of the week. So, the market is a nonstop money transacting market.
How Can I Profit With Forex
Also know that to make some purchases online across intercontinental borders, your home currency needs to be converted to the visiting country to make it a successful transaction
During this exchange or buying and selling certain changes occur to the currency rate exchange. This is what happen when you hear some people talk about currency exchange rate fluctuating
Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed.
It’s these changes in the exchange rates that allow you to make money in the foreign exchange market.
Forex in it full term is called the foreign exchange market, which is where the word “forex” or “FX,” comes from. The foreign exchange market is the largest financial market in the world.
How Big Is The Forex Market
Forex market records about $5 TRILLION a day trade volume. A transaction that is far above what the biggest stock exchange market in the world records daily.
Talking of the biggest stock exchange market in the world, we are talking about the New York Stock Exchange Market. A market that records a daily transaction of $22.4 billion per day in volume
Although it is the biggest, but it does not come close to the Foreign Exchange Market. What does this mean?
It is the most profitable financial trading market in the world
Unlike the stock or bond markets that closes at the end of each business day. The forex market is open 24 hours a day and 5 days a week, only closing down during the weekend.
As a matter of fact trading shifts
to different financial centers around the world instead of closing.
This means that as the day starts when traders wake up in the U.S. it starts and as night falls in the U. S it moves to Tokyo, to London, finally, New York, before trading starts all over again where it all began!
How Can Forex Be Confusing
Forex can be very confusing in that nothing physical is really transacted or exchanged. All that is exchanged is money and it is not exchanged physically.
Think of buying a currency (money) as buying a share in a particular country, like buying stocks of a company.
Meanwhile, the current and future value of a country is usually placed on the price of the currency. That is the health of the country’s economy is associated with the price of the currency which is somewhat a reflection of the opinion of the market.
In forex trading, when you buy, say, the Japanese yen, you are basically buying a “share” in the Japanese economy.
You are betting that the Japanese economy is doing well, and will even get better as time goes. Once you sell those “shares” back to the market, hopefully, you will end up with a profit.
Generally speaking, the exchange rate of a currency to other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.
As a new trader, you will begin trading with a few of the most popular currencies. Among these major currencies are the U. S Dollar, Canadian Dollar, The Swiss Dollar, Japanese Yen, and Euros.
The market currencies are usually represented in this format, the country to the currency. Here is an example: take NZD for instance. NZ stands for New Zealand, while D stands for dollar.
TRADING ON MARGIN
When prices are quoted to the hundredth of cents when you trade forex. How can you see any significant return on your investment? The answer is leverage.
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.
For 50:1 leverage, the same trade size would still only require about £40 in margin. This gives you much more exposure, while keeping your capital investment down.
But leverage doesn’t just increase your profit potential. It can also increase your losses, which can exceed deposited funds. When you’re new to forex, you should always start trading small with lower leverage ratios, until you feel comfortable in the market.
A Final Word On Forex
By now, you should have a better understanding of what Forex is. There are many ways to trade, techniques and tolls that can help you. We will discuss some of these in future articles, so be sure to stop back.
Please leave any questions or comments below and thank you for reading.