What is Forex About?
Forex refers to the Foreign Exchange market. The ‘FX’ market is a place where you can trade currencies from around the world. Forex traders buy one currency by selling another currency. The transactions occur simultaneously, and as such, forex brokers quote the prices of each currency together. The quotes are therefore named ‘currency pairs.’
Traders seek to make money when the value of one currency rises over the other currency they are trading. The Forex market is the largest and most traded market in the world. The Bank for International Settlements stated that “foreign exchange (FX) markets averaged $5.1 trillion per day in April 2016, according to the 2016 Triennial Central Bank Survey of FX and over-the-counter (OTC) derivatives markets (https://www.bis.org/publ/rpfx16.htm). ”
Why are Currencies Traded?
Currencies represent a country’s trade value. Anyone who wants to buy anything in another country must convert their home currency to the other country’s currency at some point during the transaction process. The FX market provides the means for the conversion to occur.
When are Currencies Traded?
Currencies are traded globally 24 hours/5 days a week, beginning on Mondays at 6:00 AM local time in Sydney, Australia. The market closes on Fridays at 5:00 PM local time in New York City, USA.
Where are Currencies Traded?
Unlike stock, bond, and futures markets, currencies are traded over-the-counter (OTC), meaning they are not traded on exchanges like the New York Stock Exchange. Instead, large banks provide most of the liquidity to the world through brokers. Brokers, in turn, offer non-bank individual traders (called retail traders) exposure to the broader FX market through trading platforms. Retail traders can access Forex trading platforms using their laptop computers, desktops, and smartphones.
How to Make Money Trading Forex
Economic, political, and other factors change over time. As a result, the value of a country’s currency will go up or down with every other country’s currency. As a trader, you can try to forecast which direction a currency will take and try to make a profit.
For example, let’s assume you analyzed economic data from the United States and Great Britain. You believe from your analysis that the price of the Pound will soon fall versus the US dollar. You can place a trade in the FX market, buying a certain number of US dollars by selling the same amount of British Pounds. If you are correct, and the price of the Dollar rises versus the Pound, then you could make money by using your US dollars to buy back Pounds at a lower price, thereby closing your open trade position at a profit.
The Risks of Forex Trading
Every trader wants to make a profit. The FX market offers traders many opportunities to do so. However, even with the best market analysis, no trader, no matter how experienced, can control which way the price will move in the future. Because of this fact, trading will always be an inherently risky activity.
In our previous trade example, instead of the value of the US dollar rising versus the Pound, the price of the Dollar could go down for an undefined period. This means that you could lose money on your trade.
Forex trading involves significant risk of loss and is not suitable for all investors. Market risk is just one kind of risk that faces FX traders. We will explore other types of risks in later articles.