What is Forex Trading?
If you've ever traveled to another country, you usually had to find a currency exchange both at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.
You go up to the counter and notice a screen displaying different exchange rates for different currencies. You find "EURO" and think to yourself,My one dollar is worth 0.84 Euro? and i Have 1000 Dollars. It Means You will get 844 Euro against 1000 Dollars.
When you do this, you've essentially participated in the Forex market! You've exchanged one currency for another.
Or in Forex trading terms, assuming you're an American visiting Europe, you've sold dollars and bought Euro.
Before you fly back home, you stop by the currency exchange both to exchange the Euro that you miraculously have left over and notice the exchange rates have changed. It's these changes in the exchanges rates that allow you to make money in the foreign exchange market.
The foreign exchange market, which is usually known as "Forex" or "FX," is the largest financial market in the world. Compared to the measly $22.4 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely generous with its $5 TRILLION a day trade volume.
The largest stock market in the world, the New York Stock Exchange (NYSE), trades a volume of about $22.4 billion each day. If we used a monster to represent NYSE, it would look like this...
Check out the graph of the average daily trading volume for the Forex market, New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange:
Forex Market Trading Volumes
The currency market is over 200 times BIGGER! It is HUGE! But hold your horses, there's a catch!
That huge $5 trillion number covers the entire global foreign exchange market, BUT retail traders (that's us) trade the spot market and that's about $1.49 trillion. So you see, the Forex market is definitely huge, but not as huge as the media would like you to believe.
Do you feel like you already know what the Forex market is all about? We're just getting started! In the next section we'll reveal WHAT exactly is traded in the Forex market.
What is traded?
The simple answer is MONEY.
Because you're not buying anything physical, this kind of trading can be confusing.
Think of buying a currency as buying a share in a particular country, kind of like buying stocks of a company. The price of the currency is a direct reflection of what the market thinks about the current and future health of the Europe economy.
When you buy, say, the EURO, you are basically buying a "share" in the Europe economy. You are betting that the Europe economy is doing well, and will even get better as time goes. Once you sell those "shares" back to the market, hopefully, you will end up with a profit.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to other countries' economies.
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