Forex 101

Learn the basics of Forex, how you can earn a profit by trading it and more.

What is Forex?

Forex, FX, or foreign exchange, is simply a market that allows us to exchange one currency for another. The FX market is the largest financial market in the world. We can profit from this as currency rates are always fluctuating.

Forex or FX is an abbreviation for the term Foreign Exchange.  The simplest way to understand it is to think of it as a transaction or exchange of one currency for another.

While a major part of foreign exchange trading is done for practical reasons such as when going on holiday or when sending money abroad etc. A considerable portion of foreign exchange transactions take place by institutional and retail forex traders who intend on profiting from the difference.

How is profit made from trading Forex?

Let’s say you live in the United Kingdom and have decided to go to the United States of America for a small two-week vacation to visit your aunt. One of the first things on your checklist may be to convert your GBP to USD? Or you’ll have difficulties making purchases.

The day you are flying out, the GBP/USD exchange rate at the airport is 1.4000. You decide to exchange £1000 (GBP) and in return, you were given $1400 (USD).

In simpler words, for every £1 you exchanged, you received $1.40.

You’ve landed in the USA and are happy to be received by your aunt, who not only said that dinner’s on her tonight, but that she wouldn’t accept you checking into a hotel and that you will be staying with her for the entire duration of your trip. Lucky you!

After having enjoyed the two weeks exploring different cities, tasting unique cuisines, sightseeing and so much more, however, the day has come for you to catch the flight back home. Your aunt gives you a big hug and waves her farewell as you walk into the airport terminal. 

You’ve checked into the airport and realise you still have some dollars left, $400 to be exact. As you need money for a cab once you land back in the UK airport you decide to exchange your dollars for some pounds.

The GBP/USD exchange rate is 1.3000. In exchange for your $400, you receive £307.96.

This means for every $1 you exchanged, you received £0.76.

If you had your entire $1400, you could’ve gotten back £1076.92, leaving you with a profit of £76.92 by doing nothing.

Who trades Forex?

The most significant instances of foreign currency exchange are done by large financial institutions, such as banks, insurance companies or other large businesses that operate internationally. The regular public also partake in this when travelling abroad or sending money overseas. The market also welcomes retail traders to profit from varying price levels.

Institutions like commercial banks are a primary example of engagement in the direct buying and selling of currencies. 

Retail forex traders can be either short, medium or long term holders, but this is subjective to the trader’s strategy. Day trading, swing trading and scalping are amongst the most common strategies for retail traders.

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