Basic questions about forex
What is forex?
There are many different definitions of forex, but from a trading perspective, you only need one: Forex is a decentralised global marketplace where traders agree to exchange one currency to another at specified prices.
According to the Bank for International Settlements, the daily trading volume of the forex market exceeds USD 5 trillion. So how can you benefit from this enormous market? You can trade price fluctuations and pocket the difference. The concept is simple. You need to:
- buy low, sell high, OR
- sell high, buy low.
Number 2 can be confusing because it sounds like you have to own the currency first to sell it, but you don’t. In forex, when you buy a currency, you are selling another simultaneously, as currencies are quoted in pairs. The result of the simultaneous buy and sell is the price difference between the two. You only trade the price difference and speculate which direction the price will go.
Let’s take a look at how cash exchange differs from forex trading: