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What is Forex?

Forex is the popular name for Foreign Currency Exchange Trading, meaning selling one currency to buy another one simultaneously. Investors participate in the exchange market, obtaining benefits from the fluctuations in the price of world currencies.

The way in which these benefits are obtained is a result of buying a currency at certain price, to be sold later on when its price is higher. The way Forex works is by choosing pairs of currencies and then profiting, or losing, when their price fluctuates in the currency market.

In fact, buying currency is nothing more than exchanging one currency for other. For example, if I buy 1000 Dollars in Yens, I'm actually selling the first in order to buy the last. This is the reason why people refer to the process of selling and buying currency in the global Currency Market as foreign exchange. Being capable of understanding future price trends in forex is the essence of currency trading.

The Forex Market

The Currency Exchange Market is the largest financial market in the world, accounting for over 4 trillion dollars in trading per day, and with volumes of activity 160 times greater than New York's Stock Exchange.

A currency strengthens in relation to others constantly; this is why the Forex market offers large amount of investment opportunities. It is open 24 hours, 5.5 days a week. Besides, there is no need of a physical location for the trading to take place; the market is a decentralized network of banks, brokers and traders. This characteristic prevents big players from controlling the market; neither bank nor brokers can influence the price of the currencies.

Currency Pairs

Between the most popular currencies exchanged in the global market we can find: the American Dollar, the Euro, Japanese Yen, the British Pound and the Swiss Franc. To easily represent Currencies we use three letters symbols. So USD represents American Dollar, EUR represents the Euro, JPY represents the Japanese Yen, GBP the British Pound and CHF the Swiss Franc.

Many brokers offer some special, "exotic" currencies, which are not as common in the market, such as the HKD (Hong Kong Dollar), TRY (New Turkish Lire) and the ZAR (South African Rand).

Since currency trading must always include two currencies (buy one, sell the other) it is always represented in Currency PAIRS. Among the most common currency pairs we can find EUR/USD, GBP/USD, USD/JPY, USD/CHF (known as majors) and USD/CAD, AUD/USD, NZD/USD (commodity pairs). Any other combination is known as currency cross.

 

 

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