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What is Forex Trading?
Forex, foreign exchange in full, is a worldwide financial market that allows retail traders to Sell and Buy currencies. The prices of currencies are always fluctuating. This allows traders to take advantage of the price movements of currencies.
How does it work?
Let’s say you were born in the UK and are a British citizen who is traveling to the United States of America. Britain uses the Great British Pound(GBP) as their currency and USA uses Unite States Dollar(USD) as their currency. This means that when you arrive in the USA you will have to exchange your money from the GBP to the USD currency. This is what we call foreign exchange, Forex in short.
At the moment (19 Feb 2022), 1 GBP is equal to 1,36 USD. This is the exchange rate and it is a comparison of these two currencies in value. Let’s say when you left home(Britain) you had an extra 1000 GBP that you kept in in case an emergency emerges when you are in the USA. When you enter the USA this 1000 GBP will be exchanged for 1360 USD since the exchange rate is 1.36.
How is profit made?
A week later after having an amazing time in the US, you need to return home(Britain). This means you need to switch the USD currency to the GBP currency. And since the currency values are always fluctuating, Let’s hypothetically say the USD increased in value and consequently the exchange rate has changed from 1.36 to 1. This means that now 1 GBP is equal to 1 USD. This implies that the 1360 USD you had kept will now be exchanged for 1360 GBP since 1 GBP is equivalent to 1 USD. But initially, you had 1000 GBP when you left Britain. What just happened?
Currency Pairs.
You might have guessed that the exchange rate between the GBP and USD is called a currency pair. In this case, the currency pair is called GBPUSD. Other examples of forex currencies are USDJPY, GBPJPY, EURUSD, USDCAD, etc. You can Buy or Sell currency pairs from your phone if you have a broker.
Recommended Brokers
When you Buy GBPUSD, you are basically betting that the Great British Pound will increase in value when compared to the United States Dollar. Alternatively, we could say you are betting that the USD will decrease in value compared to the GBP currency. When you execute the order on your device, your broker makes the currency exchanges in your behalf. This means that if you buy GBPUSD and the GBP increases in value compared to the USD, you will make profit. However, if you buy GBPUSD and GBP decreases in value compared to the USD, you will make a loss.
How to know when to BUY or SELL?
Professional traders use what is called technical analysis and fundamental analysis to come up with a strategy which indicates when to BUY or SELL. You can learn more about this on the Forex Made Simple YouTube Channel.
