What is Forex trading?

What is Forex trading?

by Murtaza Khan

The term Forex is derived from the foreign exchange with the trading of the foreign currencies popularly known as Forex trading and the place where the forex trading is done is known as the Forex market.

The currency of any country commands its own price with reference to the currency of any other nation. The difference between the values of these two currencies is taken into account during the Forex trading.

The Forex market is a 24 hour, 5 days a week cash market where currencies of different nations are traded through global Forex dealers. Foreign currencies are continuously bought and sold across local and international Forex markets and the value of a particular currency may change against other international currencies from time to time. The goal of Forex trading is to earn profit from foreign currency value movements. Forex trading is always done in a pair of currencies like the EURO/USD or AUD/USD.

With Forex trading, usually it is desirable to trade only when it is expected that the currency you are buying is likely to increase in value relative to the currency you are selling. However, the Forex market is mostly speculative. Forex Trading is the largest financial trading market in the world. In Forex trading, when you buy the currency of a particular country, you are investing your money in the economy of that particular country. If the economy of that particular country is healthy, then the value of your investment will increase, and you will make a profit and if the economy of that county is in bad shape then the value of your investment may decrease and you may end up in a loss. Usually the Forex market is considered as the most volatile market in the world.

The Forex market came into existence way back in the year 1971. Till recently the requirement for the start of Forex trading required a huge investment and only individuals and companies with tens of millions of dollars could afford to trade in the Forex market. But the scenario has changed now completely and you can get started with an investment of as little as $50. Most of the trade in the Forex market includes U.S. Dollars (USD), Euros (EUR), Japanese Yen (JPY), UK Pounds (GBP), Swiss Francs (CHF), Canadian Dollars (CAD) and Australian Dollars (AUD) and these currencies are considered as the most popular currencies in the Forex trade. Since the Forex market is open 24 hours, you can trade in the Forex market any time that suits you best.

When you opt in to trade in the Forex market it is desirable that you buy a foreign currency at one price, wait until it has increased in value, and then sell your holding of foreign currency. But it may require a considerable amount of time and it tests the patience you have but it will mean than you have a better chance to actually register the significant profit from the trading. There is considerable risk involved in the Forex trading, supposing the foreign currency that you expect to increase in value, falls in value instead and then you make a loss on the trade straight way. This is the condition portrayed for the long term investments but in the real terms in a Forex market nobody is going to hold on to their foreign currency for months or years. Most of the Forex trade transactions are completed within seven days at the most and Forex trading involves very small short-term changes in currency values. These short-term changes take place within a few hours in any day. This gives you the scope of not loosing a big amount of your investment from any particular deal but it also does not guarantee you a significant gain from the deal.