Forex or foreign exchange is the process of buying and selling currency. The simplest way to think of forex (or FX as it is sometimes known) is to think of a travel agent. When you go on holiday you buy the currency of the country you’re going to and sell the currency of the country you’re in. Essentially, you’re trading currency and this is very similar to forex trading.
What is Forex?
The forex market is one of the most liquid financial markets in the world and the daily volume of trade is around $4 trillion. This is because currencies have to be traded constantly in order for business to be conducted between countries. There’s no central forex location due to the global nature of the markets and its size means that it cannot be influenced by a single person or company. Realistically, it can only be shaped by world events.
Buying, Selling and Exchange Rates
Forex trading involves the simultaneous buying of one currency and the selling of another. Each transaction has to happen in a pair and each currency has an abbreviation e.g. EUR for the euro. The ability to trade these currencies stems from the fact that the value of both currencies in the pair is constantly changing.
In forex, any exchange rate between currency pairs are labelled as the bid price and the ask price. The difference between these two prices is known as ‘the spread’ and this is how your forex broker will make its money. As with any business, prices will vary between brokers, so shop around to make sure that you get the best deal.
Points and Pips
In order to turn a profit, you have to know exactly how spreads are measured. So, let’s look at an example:
If USD/EUR has a bid price of 1.400 and an ask price of 1.403 then the spread is three points or, as they’re known in the world of forex, three ‘pips’. A ‘pip’ is the smallest denomination that a currency can move by and this is the same for all currencies the world over.
How Often Can You Trade?
Due to the fact that the forex market is global and doesn’t have a central base, you can trade whenever you want from anywhere in the world. The forex market does not open at weekends, however, and this is the only time that you cannot place a bet. Just think of it being open 24 hours a day, 5 days a week. This means that you can trade at practically any time you want.
So, Why Invest in Forex?
If you regularly keep up with the news and follow the latest financial announcements then you have the opportunity to make a profit from forex. There’s no experience required and you can start from scratch whenever. Try watching some educational videos on trading basics to learn more and, if you think that forex is right for you, find yourself a broker and start investing.