What is Forex Trading?
‘Forex’ or ‘FX’ derives from ‘Foreign Exchange’. It is a decentralized global market where traders are able to buy and sell currencies. It is the largest and most liquid market in the world, with an average daily trading volume worth over $5 trillion.
When a person travels from one country to another, it is usually required to convert money to the currency that is used in the country that they are travelling to. For example, when a resident of the United States travels to Italy, he/she is required to exchange their US dollars to the Euro currency.
In the same way, an international firm is sometimes required to exchange currencies in order to pay employees that are located overseas. The exchange rate fluctuates continuously as it is based on supply and demand. Therefore, this determines how much of currency A will be required in order to obtain currency B. Depending on the price, it is sometimes advisable to wait for a more favorable rate as it can make a big difference when a large amount of exchange is concerned.
In Forex, currency pairs can be traded without physically owning currencies. In addition, a profit or a loss can be made from both upward and downward market trends.
Major currency pairs contain the US Dollar, generally have the lowest spreads and are the most liquid instruments. Cross currency pairs are traded against each other excluding the US dollar (ex: CADJPY, EURAUD…).