Lesson 1: What is Forex?
What is Forex?
Forex, also referred to as “FX”, stands for Foreign Exchange, and it is the market where currencies are traded. It is actually the largest and most liquid market in the world, with a traded volume of USD 5 trillion per day. If you compare it with New York stock exchange that reaches up to USD 22.4 billion per day, you would probably understand what we are talking about! Tokyo Stock exchange measures around USD 18.9 billion of trading volume per day and London Stock exchange around USD 7.2 billion per day. If we illustrate the markets by towers of dollars, here’s how they compare:
What is Trading?
There are several examples of currency trading, from something very simple to complex activities. For example the exchange of a British tourist’s Pounds into US Dollars when traveling abroad, or the hedging of a bank’s exposures to different countries.
In forex market, trading is simply the process of buying one currency and simultaneously selling another in order to gain a profit, where the profit (or loss if you do not estimate it well enough) results from the changes in the exchange rates. When you trade forex, you do not physically buy or sell a currency but speculate on how its value will change in relation to another currency – this is why FX trading happens in pairs. The price of one currency compared to another reflects what the currency is worth based on the country’s current and future economy. As the economy of a country is affected by many factors, the country’s currency is affected by them as well.
In forex, currencies are traded in pairs. Proceed to the next lesson to understand the concept of currency pairs.