What Actually Is Forex?

Forex, is simply a shortened down version of foreign exchange and it is the world wide market for the world’s currencies in which they are traded on a daily basis. Over $1 trillion dollars are traded on the forex market everyday! Making it the world’s largest, most liquid market which attracts an endless number of people everyday who hope to profit from its movements. To show the enormity of the forex market, not even the world’s combined stock markets come close to the sheer size and volume, and that is saying something. However the world of forex is more complicated than what it is made out to be, and we will look at what exactly forex is and how you can use it.

 

Forex in its simplest form is when you are going on vacation overseas and you need the local currency so you can spend money. So you make a trip to the bureau de change and exchange your United States Dollars, for British Pounds for example and in doing this you have completed a foreign exchange. Obviously you’re not going to get the same amount of British Pounds when exchanging United States Dollars, due to the exchange rate. So if you wanted to exchange $100 for British Pounds you would get £74 based on the current exchange rate. However, this won’t be the case everyday because the exchange rate is constantly changing because a plethora of fundamental aspects, such as inflation reports, labour statistics and interest rates, which all have some sort of impact on a country’s currency.

 

Believe it or not, you can trade currencies just like stocks based on where you think they are headed and what you think their value is. The great thing about the forex market and currencies within it, is that you can trade both directions very easily, whereas in the stock market there can be times when a certain stock is very illiquid. If you own a stock that you wish to sell, there may not be any buyers in the market and so you are left holding a stock that could be dramatically losing value. If you wish to sell a currency in the forex market, it is very easy to do so because the market is so vast. For example, if you think the Canadian dollar is going to lose its value due to a drop in oil production, then you could sell it against another currency like the U.S. dollar, and if you think the current trend will continue you can keep selling and increase your profits.

 

Before you can start making money profiting from the continual movements on the world wide currency markets, you need to have access to a platform that can aid in helping you execute your trades. Unless you have millions or maybe even billions to have direct access, you will have to use third party platforms to place trades. One thing you will come to learn when you join a trading platform like IG for example, is the offer of leverage that traders can use. Leverage is where you borrow a certain amount of money needed to invest in something, and with forex the money is usually borrowed from the broker (trading platform) and is usually as high as 100:1. Meaning that for every $1000 in your trading account, you can trade up to $100,000 in value, and many traders think that the reason why the forex market offers such high leverage is due to the fact that leverage is a form of risk. Without manageable risk, and I underlined and italicised the word manageable because so many traders actually neglect to manage their risk, and this is how they end up blowing up their accounts and becoming part of the 90/90/90 group, which is to say that “90% of traders lose 90% of their money within 90 days”.

 

The fact of the matter is, forex trading is not an easy skill to master despite the constant flurry of marketing material that we see on social media, promising that you can turn $100 into $10,000 within a month, it just doesn’t happen. However, that’s not to say that you can’t turn $100 into $10,000 but it takes time to harness and test a trading strategy that works. Another thing that separates the successful traders from the unsuccessful ones is psychology, and how they control their emotions on a daily basis, and especially during times of hardship.