What is Forex trading ?

Forex is the acronym for Foreign Exchange.

It is the market place where the currencies of the world are traded.

The Forex market is also regarded as the largest market in the world with a daily turnover of around 3.2 trillion dollars.This is twice the size of the combined US equity and Treasury markets. The Forex market is also unique when compared to the other financial markets as it has no centralized or physical location. It is just a network of banks, financial institutions, hedge funds, corporations and retail traders buying and selling currencies with one another. Because of this unique characteristic, the Forex market is not bound by a single time zone. It operates on a 24 hours timeline from one time zone to another where all the major financial centers are located.

Previously, the only way a retail trader can access the Forex market was through the commercial banks that deal with currency trading for investment and trade purposes. In 1971, when the major currencies of the world floated their currencies, trading in currencies increased tremendously. Nowadays, apart from importers and exporters dealing with Forex, there is a whole new array of market participants in the Forex market. They include hedge funds, portfolio managers, speculators and the retail traders. Each individual group of market participants has differing objectives for dealing in Forex. They range from payment for goods and services to risk hedging to pure speculation.

By definition, Forex trading is the action of swapping currencies from different nations with each other at a rate determined by the Forex market. For example the currency used in the European community is the Euro while the currency for the United States is the US dollar. Thus, when a trader buys the Euro, he will also be selling the US dollar at the same time. In Forex terms, this means going long with the Euro and US currency pair (EUR/USD).

Generally, to trade Forex, you need to go through a market maker or a Forex broker. As a retail Forex trader, you will select the currency pair that you want to trade in. the selection will be based on your own analysis. Normally, the Forex broker will not be making any recommendation to you but will just execute your trading orders.

To make money on Forex trading, you can either take a long market position or go short on your market position. By going long, you are buying a currency pair and hoping to sell it later at a higher rate and thus profiting from the differences between what you paid for and what you got from selling the currency pair. Going short is the opposite scenario. In this situation, you will be selling a currency pair at the current market rate and hope to buy them back later at a lower rate. This is one of the main attractions of the Forex market. You can profit from the market regardless if it is a bull or bear market. As long as you can predict which direction the market is heading, you can position yourself to take advantage of the market trend.

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