Beginner – What Is Forex

The foreign exchange (also known as FX or forex) market is a global marketplace for exchanging national currencies against one another.

The FX market is where all currencies are being traded globally. Currencies are important to most people around the world, whether or not they come to realize it. One of the main reasons being, in order to conduct foreign trade and businesses, currencies are required to be exchanged accordingly. For example, a US technology company (buyer) wants to trade for parts from Japanese company in Japan (seller) for ¥1,000,000. In order for this trade to be executed, the buyer is required to exchange an ‘x’ amount of $ into ¥1,000,000 in order to pay the seller.  

A single pound on Monday could maybe get you 1.19 euros. Whereas on Tuesday, it could fluctuate to 1.20 euros. This tiny change may not seem like a big deal. But think of it on a bigger scale. A large international company who needs to pay overseas employees. Using the example above, imagine how largely the company could be affected if, just by simply exchanging one currency into another costs more depending on when you exchange it? These few pennies add up quickly. In both cases, you—as a traveler or a business owner—may want to hold your money until the forex exchange rate is more favorable.

Just like stocks, you can trade currency based on what you think its value is (or where it’s heading). But the big difference with forex is that you can trade both ways, namely up or down just as easily. If you think a currency will increase in value, you can buy it; if you think it will decrease, you can sell it. With a market this large, finding a buyer when you’re selling and a seller when you’re buying is much easier than in other markets. Maybe you hear on the news that China is devaluing its currency to draw more foreign business into its country. If you think that trend will continue, you could enter forex trading by selling the Chinese currency against another currency, say, the US dollar. The more the Chinese currency devalues against the US dollar, the higher your profits. If the Chinese currency increases in value while you have your sell position open, then your losses increase and you might want to get out of the trade.

There are three different types of forex market:

-Spot forex market: the physical exchange of a currency pair, which takes place at the exact point the trade is settled – ie ‘on the spot’ – or within a short period of time

-Forward forex market: a contract is agreed to buy or sell a set amount of a currency at a specified price, to be settled at a set date in the future or within a range of future dates

-Future forex market: a contract is agreed to buy or sell a set amount of a given currency at a set price and date in the future. Unlike forwards, a futures contract is legally binding