FOREX or FX stands for Foreign Exchange. The foreign exchange market is the worldwide market in which currencies are exchanged from one country to another.
A currency is what we usually refer to as money. Some examples of currencies are the US Dollar ($), Japanese Yen (¥), and the Euro (€). The relative value of currencies are constantly fluctuating versus each other. One day a single US dollar ($) might be worth 1 Euro (€) and the next day that same dollar ($) might only be worth 0.95 Euros (€).
There are many many factors that go into why these values change, such as the health of a country’s economy, monetary policy changes, news events, and on and on, but to keep things simple lets not worry about that right now.
Have you ever travelled to another country? Chances are you used a physical currency exchange booth at some point to get some of the currency of the country you were visiting for your trip. If you recall, there were a bunch of numbers displayed that showed the various exchange rates between different currencies.
The foreign exchange market is essentially a giant worldwide version of that currency booth. The Forex market is actually the largest financial market in the world! In fact, the Forex market is over 200 times larger than the New York Stock Exchange (NYSE). Whoa!
All sorts of entities trade Forex: from the largest banks and governments in the world, all the way down to individuals like you and me sitting on their laptops at home.
Why would you want to trade Forex? Here are some reasons:
- Forex trading is highly accessible. Trading can be done completely online, without fancy hardware. All you need is a phone/laptop and an internet browser.
- Forex trading is open 24 hours a day 5 days a week. This means you can find a time to trade that fits your schedule no matter what else is going on in your life.
- You can trade from anywhere. You can trade while traveling, from home, at the beach, in bed, wherever works best for you!
- You can open a trading account with very little capital. My broker lets you sign up with as little as $10! (Although you definitely want to have more than this set aside for anything more than practice…)
- There are very sophisticated demo platforms. It’s easy to get started learning Forex because most brokers allow you to trade on a demo account that functions exactly like a real money account.
- No liquidity issues. The forex market is highly liquid, meaning you’ll almost never get stuck in a trade are have a hard time getting filled at a specific price.
- You can easily buy or sell, allowing you to take advantage regardless of which direction the markets are trending (or even if they are headed sideways).
- Forex trading technology is considerably more advanced than stock trading platforms. I’m not sure why this is, but forex trading platforms are definitely more user friendly and feature-rich.
- Forex brokers allow you to trade using leverage. Trading with leverage means that you are controlling a much larger position with a smaller amount of their own money. This can be both good and bad, because while your profits are amplified so are your losses.
- Low fees. Forex brokers usually don’t charge commissions for placing a trade. They make money on the spread (the difference between the bid and ask price).
I hope that helps you understand a little more about what Forex Trading is. Next we’ll start diving into how Forex works.