What is FOREX Trading?How it works?

What is forex?

Quite simply, it’s the global financial market that allows one to trade currencies.

If you think one currency will be stronger versus the other, and you end up correct, then you can make a profit.

Once upon a time, before a global pandemic happened, people could actually get on airplanes and travel internationally.

If you’ve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.

Foreign Exchange

You go up to the counter and notice a screen displaying different exchange rates for different currencies.

An exchange rate is the relative price of two currencies from two different countries.

You find “Japanese yen” and think to yourself, “WOW! My one dollar is worth 100 yen?! And I have ten dollars! I’m going to be rich!!!”

When you do this, you’ve essentially participated in the forex market!

You’ve exchanged one currency for another.

Or in forex trading terms, assuming you’re an American visiting Japan, you’ve sold dollars and bought yen.

Currency Exchange

Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have remaining (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.

What is forex?

The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world.

The FX market is a global, decentralized market where the world’s currencies change hands. Exchange rates change by the second so the market is constantly in flux.

Only a tiny percentage of currency transactions happen in the “real economy” involving international trade and tourism like the airport example above.

Instead, most of the currency transactions that occur in the global foreign exchange market are bought (and sold) for speculative reasons.

Currency traders (also known as currency speculators) buy currencies hoping that they will be able to sell them at a higher price in the future.

Compared to the “measly” $200 billion per day volume of the New York Stock Exchange (NYSE), the foreign exchange market looks absolutely ginormous with its $6.6 TRILLION a day trade volume.

That’s trillion with a “t”.

Let’s take a moment to put this into perspective using monsters…

The largest stock market in the world, the New York Stock Exchange (NYSE), trades a volume of about $200 billion each day. If we used a monster to represent the NYSE, it would look like this…