What is forex trading?

Foreign Exchange, also known as forex or FX, means exchanging one currency for another or, in other words, paying in one currency to buy another. Every time you travel to a destination which uses a different currency, you engage in foreign exchange as you use your country’s money to buy “local money”. Millions of traders around the world do exactly the same every day, not because they want to travel but because they speculate on the value of different currencies with a view to making a profit.

The forex market is absolutely massive, with over $250 billion traded every hour. It’s also almost always open for business, as it starts trading when markets open in Australia on a Monday and only closes when the US ends the working week on a Friday. Because of the volume of traders available at any given moment, transactions are quick and carry low fees. Moreover, brokers offer high leverage which means you can trade beyond your means with a small capital.

So how do you start trading in the forex market?

The first step is to create an account with a regulated forex broker. You can start with a small capital and use the leverage offered by brokers to open a large position, but always remember that with great opportunity comes greater risk.

The next step is to decide which currency pair you’ll invest in. This isn’t a lucky guess: the FX market is volatile because a currency’s value fluctuates depending on each country’s economy, geopolitical developments, trade and tourism. If you want to succeed, you have to follow what’s happening in the world or take advice from people who do. You will also find that currencies are roughly divided in major and minor ones. As you can imagine, major currencies are the most traded one and they belong to strong economies, e.g. the US dollar (USD), the Euro (EUR), the British pound (GBP) and the Japanese yen (JPY).

Each currency is represented by a 3-letter symbol and they always trade in pairs. The most popular pair is EUR/USD. Let’s see a quotation example:
The first currency in the couple, i.e. the EUR, is called the base currency and the second one, i.e. the USD, is the quote currency. At this price, you will need 1.1733 of the quote currency to buy 1 of the base currency.

Bitesize basics
  • Currency values fluctuate for geopolitical and economic reasons.
  • Foreign Exchange, aka forex or FX, is the buying and selling of currency with a view to making a profit.
  • Forex trading is fast, cheap and you can start with a small capital thanks to the leverage offered by brokers.
  • Currencies trade in pairs, with the most popular pair being the EUR/USD

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