What is Forex?

The foreign exchange (also known as forex or FX) market is a decentralized global market in which all the world’s currencies are traded. Forex traders speculate on fluctuating values of different currencies. These two currencies make up what is known as a “currency pair.” The exchange rate then represents the relative purchase prices between the two currencies.

Example:

The EUR/USD rate represents the amount of US Dollar one Euro can buy. If you think the Euro will increase in value against the US Dollar, you then buy Euros against US Dollars. If the exchange rate rises, you sell the Euros back and reap profits.

Types of Forex Traders:

  • Scalpers pick fast trades and only hold for a few seconds to minutes. They aim to earn from very small amounts of price increments (pips) as many times as they can throughout the busiest times of the day.
  • Day traders, as the name suggests, do not hold their traders overnight. They pick sides at the beginning of the day and end the day with profit or loss.
  • Swing traders hold on to trades for several days at a time. They do not monitor their charts throughout the day, and instead typically spend a few hours on market analysis each day over a longer period of time.
  • Position traders make trades that last for several weeks, months, or even years. They rely predominantly on fundamental factors when analyzing the markets and make their decisions based on them.

Why Trade Forex?

The forex market is the largest, most liquid financial market in the world with an average daily trading volume of more than $5 trillion. The world’s total combined stock markets do not even add up to this amount. Through technological advances in the electronic and telecommunications fields, networks of banks and brokers have gained access to an almost instantaneous transfer system of information, data and funds. With these cutting edge advancements in computerized trading, spot FX has gained a significant advantage over other financial instruments, as it is not limited to time zones and the strain of trading floors.

There are many reasons why people trade forex, with these being the most popular ones among them:

  • The Forex market has the highest market trading volume out of all the markets.
  • Traders can trade 24 hours a day, 5 days a week.
  • Forex prices are driven by central banks, interest rates and geopolitical events.
  • Traders who only have a small amount of capital can take advantage of its high leverage to get more lucrative trades.
  • Traders can make profit regardless of whether there is a bullish or bearish market trend by trading on forex derivatives.