What is Forex?: A Beginner's Guide

Forex or the ‘Foreign Exchange Market’ is notably the largest financial market in the world. Over $3.2 trillion is believed to be exchanged between traders every single day – 3 times more than the aggregate amount of the US Equity and the Treasury Market combined.

Although the Forex market has no actual physical location or central exchange, this global network is operated by banks, corporations and individuals who are interested in trading one currency for another.

There are four major currency pairs that you need to take into consideration if you are serious about trading on the market:

• Euro against US dollar (EUR/USD)
• US dollar against Japanese Yen (USD/JPY)
• British pound against US dollar (GBP/USD)
• US dollar against Swiss franc (USD/CHF)

In the past Forex was only available to large financial institutions and banks, however recent years have witnessed a series of advancements in technology that have enabled Money Managers and individual Forex traders to trade live – and independently - on the Foreign Exchange Market.

Traders can literally trade from anywhere in the world: London, New York, Tokyo, Zurich, Hong Kong, Singapore, Paris and Sydney, there is no limit to where and how you trade.

How does it work?

The trick to being successful in Forex trading is to first determine whether you think 1 currency will appreciate against another. If you feel this is the case, you can exchange the second currency for the first.

Alternatively, should this exchange ultimately work out in your favour, you may then make the opposite deal and exchange the first currency for the other.

Types of Forex Trading

There are 3 ways to trade with Forex: spot market, forward market and future market:

Spot Market: Here the currency is bought and sold according to the current price. This is determined by supply and demand which is extensively influenced by current interest rates, economic performance, sentiment towards political situations and perception of future performances.

Futures and Forwards: these two markets do not actually trade in actual currencies. Instead they focus on contracts which represent claims to a certain currency type; a specific price per unit and a future date of settlement.

It is undeniable that the Forex trading market has dramatically changed in terms of accessibility in the last 5-10 years. No longer are brokers the sole voice and representatives for traders wishing to make a profit in this niche. Software is now being developed which will enable traders to trade independently from the comfort of their own home.

Remember if you're new to FOREX to use one of the demo accounts to learn how that software works and familiarise yourself with the market. FOREX trading can involve significant financial risk even for experienced traders.