If you have ever wondered what people mean when they talk and write about Forex trading then here is a very brief introduction to a very large subject. Let’s start by saying that the word ‘Forex’ is an abbreviation of ‘foreign exchange’ and therefore Forex trading is simply trading in the currencies of different countries.
Which is all well and good, but it does not get us any farther towards answering the question posed in the title of this piece, really. How do people make money from Forex trading? In fact why is Forex the world’s most traded market? Let us give an example. Let us take as our base currency the pound sterling. When you are Forex trading you speculate if your base currency (the pound in this instance) will rise or fall in value against another currency – for the sake of this example, let us say the American dollar. If you think the value of the pound will rise against the dollar then you will go long (that is, you will buy.) If you think the pound will depreciate in value then you will go short (that is, sell.) This is the basis of Forex trading.
You will see from this that Forex trading is essentially the act of selling one currency while buying another at the same time. The trade is driven by the rise and fall of currency values against each other, which is itself driven by events in the wider world, concerning politics and economics. Forex trading, when it is performed successfully, enables the trader to make a profit by speculating that way the currency value will fluctuate in the future.
The over-the-counter Forex market is huge but unlike stock exchanges it does not have central physical locations. It is rather a globally connected network comprising individual traders, businesses and banks, all over the world. You will see then that the Forex market is open for business 24 hours a day. Forex trading is like the old saying about New York. It is a market that never sleeps, except for the weekends. Forex trading carries on from Sunday evening through to Friday night, from locations as diverse as Wellington in New Zealand to New York itself.
One feature of Forex trading that should be mentioned here is the matter of leverage. The fact that you only need put down a small percentage of the full value of your Forex trade brings with it pros and cons. Trading on margins means that both profits and losses can be leveraged. In other words you can quite simply make a lot of money or lose a lot of money when you are Forex trading. There are various risk management procedures that you can and should put into effect. Always remember the risk.
There is a great deal more to be said about Forex trading and if you wish to enter this trade then you will certainly have to do your research and learn about Forex pricing, Pips (that is percentages in points) and spreads, not to mention the whole fascinating subject of what causes currencies to fluctuate. Forex trading is a big market and a big subject.