What is Forex Trading?
If you have ever asked what is forex trading, then this article is for you. After numerous questions and requests we have decided to write a short article about what Forex Trading is. With all the false advertisements on the internet and in social media it’s easy to get the wrong idea about Forex Trading.
Thus, in this article we will try to explain the basics of what Forex trading is in very simple terms. However, before we look at what Forex Trading is, let us just quickly clarify what it is not.
What Forex Trading is not
Forex trading is not gambling. Forex Trading is not a get rich quick scheme. False advertising and scammers has given Forex trading a very bad reputation. As a result, people normally associate Forex Trading with gambling.
So what is Forex Trading if it is not gambling? In short, Forex Trading is the speculative buying and selling of currencies. Just like any other speculative investment there is always associated risks. People need to be aware that it is possible to lose all of your capital with a single Forex trade if you do not follow proper risk management.
Unlike gambling, Forex Traders take calculated risks by relying on statistical probabilities to determine trades. That is another way of saying we don’t rely on luck! You see, unlike gamblers, Forex Traders do not hope for the dice to role in our favour. Successful Forex Traders take trades in line with probabilities and work hard to minimize their risk wherever they can.
What is Forex?
Before we look at Forex Trading, let us start by looking at what Forex is. The word Forex is the abbreviation for the phrase foreign exchange. Every country in the world has different currencies. In Australia we have the Aussie Dollar (AUD), in South Africa we have the Rand (ZAR), and in United States we have the US Dollar (USD) etc.
Let us suppose that the exchange rate of the USDZAR is 10.00. That means that 10 ZAR is worth exactly 1 USD.
Now let us suppose that we wanted to buy a book for a $100 but I live in South Africa. That means I would need to exchange R1,000 in order to get the $100 I need for the book.
When I want to buy anything from another country, I need to exchange my ZAR for the currency of the other country. Thus, in simplified terms, Forex refers to the exchange of currencies.
What is the Forex market?
Now that we know what Forex is, we can take a look at the Forex Market. The Forex market is a decentralized market where currencies are exchanged with each other. The Forex Market is estimated to have an approximate daily trading volume of $5 Trillion USD. As retail traders we trade in the spot forex market which is estimated at $2 Trillion per day.
To put this into perspective, the New York Stock Exchange only has approximately $74 Billion USD trading volume per day. Without going into too much details the benefit of the huge trading volume means there is much better liquidity in the Forex market. The higher the liquidity, the cheaper it is to trade and the easier it is to get in and out of trades.
What is Forex Trading?
So the question we get asked a lot is “what is forex trading”. Now that we know what Forex and the Forex Market is we can take a closer look at Forex Trading itself. A lot of people do not understand how people can make money from Trading Forex. The idea is quite simple once you understand the basics.
Let us suppose that the exchange rate of the USDZAR is 10.00. That means that 10 ZAR is worth exactly 1 USD. I decide to buy $100 at a cost of R1000.
However, after we bought the $100 at a price of R1000 the exchange rate increased from 10.00 to 15.00.
The exchange rate that increase from 10.00 to 15.00 means that my $100 is now worth R1500 compared to the R1000 that I spent to buy it. Thus, if I now choose to sell my $100 at the new exchange rate I have made a profit of R500.
Now, even though that was simple, the intricacies of how profits are made in Forex is a bit more tricky. However, this should get you off to a good start.
In Forex Trading we do not only trade one currency at a time. We trade Currency Pairs.
For more information on what Currency Pairs are see our article How to Trade Forex. In Forex Trading we always trade currencies in pairs.
We can BUY and SELL a currency pair. This means we can profit when the market is moving up and when it is going down. When we are buying or selling a currency pair, we are actually buying the one currency and selling the other at the same time.
This means that we never actually own the currencies that we are selling. We are merely spread betting or speculating on whether we think the future exchange rate between those two currencies will go up or down.
How Profits & Losses are made in Forex Trading
Let us take the EURUSD currency pair as an example. Let us assume I place a buy trade on the EURUSD pair. That means I am buying Euros and selling USD at the same time. Correspondingly, when I sell the EURUSD pair, I am selling Euros and buying USD at the same time. This means by buying or selling I am merely speculating whether the exchange rate between the Euro and USD will go up or down.
Forex Traders speculate whether the exchange rate between two currencies will go up or down. Let us suppose a trader speculates that the value of the Euro will increase against the USD. The trader will buy Euros and sell USD and profit when the exchange rate moves in their favour. When the exchange rate does not move in their favour the trader loses their trade or loses the money they risked on that specific trade.
It is a bit more complicated and technical than that. However, the aim of this article is to give a broad idea.
We hope we have given a basic answer to the question, “what is Forex trading”. Forex Trading can be a very lucrative and exciting investment. However, being successful in Forex Trading will require very hard work and commitment. Just like any other career, it will take time to master it.
As always, our advice is to make sure you invest in good Forex Training before trading with real money. Feel free to visit our website if you want to know more about what is Forex Trading or if you want more information about our Forex Trading Courses.