Welcome to the World of Forex

Maybe this is your first step into the exciting world of Forex, or perhaps you’re an advanced trader wanting to brush up on some skills. Either way, this blog post series has been designed with you in mind.

This is the introductory post of a series stemming from the first module of our forex trading handbook. It’s a comprehensive (but painless) coverage of some of the important basics of the foreign exchange markets.

By the time you have completed this introduction series, you should be able to cut through the Forex jargon with ease, clearly, understand how currencies are priced relative to each other and appreciate market behaviors such as supply and demand.

Furthermore, you will recognize who the market players are and whom you will be trading against. You’ll understand the effects of trading during various times of the day, learn how to calculate the value of a pip, discover the various methods for executing trades and even be introduced to Forex analysis.

You might think, what is Forex?

‘Forex’ simply stands for FOReign EXchange; in the same way that FX is taken to represent Foreign EXchange. Forex and FX can be used interchangeably. Forex is the largest financial market in the world, but it is not a physical market, and therefore has no central point. There is no big Forex building in London or New York, or anywhere else for that matter. If you buy one currency using another, whether in your local bank, on an online exchange or at the airport, you are participating in the Forex market.

This market covers everything from you buying your foreign currency for your holiday abroad through to large international companies hedging their exposure to the different countries they operate in, and, of course, everything in between.

Compared to the $6 billion a day volume of the London Stock Exchange, the foreign exchange market is far larger — measuring close to a whopping $5 trillion a day in traded volumes. That’s 800 times the size!

Speculators in the market readily make up $2 trillion of that daily volume. This leaves a whole lot of liquidity for traders to play with (find out more on in our forex trading handbook).

And what is Trading?

Trading is simply the process of buying and then selling something with the goal of generating a profit. In Forex trading, we buy one currency using another. This can also be thought of as buying one currency and selling another. If someone buys yen and uses dollars to pay for them, they are buying yen and at the same time selling dollars.

As with all markets, the current price of a currency is based on what the market is prepared to pay for it. In Forex, this is called the ‘exchange rate’ between currencies, often simply referred to as ‘the rate’. The exchange rate is simply a measure of what the market thinks one unit of one currency is worth in a unit of another currency.

In the next two post we will delve into basic market workings and supply & demand. Make sure you don’t miss them, sign up to our newsletter.