What Is Forex And Why Has It Been Popular Till Now?

What Is Forex And Why Has It Been Popular Till Now?

Forex or FX is the short form for foreign exchange. It is a marketplace where international currencies are exchanged. The foreign exchange market is the most liquid and the largest in the world, with over $5.3 trillion changing hands in the market daily.

There’s no central location for the market. Forex is a network of individual traders, financial institutions, brokers, and banks connected electronically.

Whenever you sell US dollars to buy EUR, or you exchange Japanese yen for US dollars at a bank exchange or the airport, you are taking part in forex.

You can also trade in the forex to make some cash. The internet has made it easy for individuals to take part in the forex trade the same way traders from investment funds and largest banks do. The individuals in this market must trade through the best international forex brokers or banks to trade in this market.

What you’ll need is a PC/laptop with an internet connection and a forex broker to open for you a trading account.

How Forex Trading Works

As stated above, the forex market involves exchanging one currency for another.  The most important thing in the forex market is the rate at which one currency is exchanged for another. Top brokers usually have those rates on their websites. But it’s worth mentioning that these rates are not constant, sometimes they can change even within seconds.

Generally, the exchange rate of a currency pair indicates the relative strength of the economies of the two countries in question. For example, if the economy of the US is stronger than the Eurozone economy, the dollar will be stronger than the euro.

How To Make Money By Trading On the Forex

As a new investor, you’ll need the best forex trading app for beginners, the best online forex trading platform, or the best online forex trading broker to hold your hands. But how will you make money? Let’s use an example to illustrate this.

If the current buy EUR/USD exchange rate is 1.45, it means you’ll part with $1450 to buy 1000 euros. If later, the sell EUR/USD exchange rate becomes 1.55, you’ll make $1550 by selling your 1000 euros. This means you shall have made a profit of $100. 

If the EUR/USD sell rate goes down to 1.35, you’ll only make $1350 by selling your 1000 euros. Here, you shall have made a loss of $100. This is a good illustration of how you can make or lose money on the forex market.

That said, you need to pick the best online investment brokers to make profits on the forex market. The experts know how to speculate on the exchange rates, so they will choose for you the currency pairs that can help you make profits.

However, even with the most trusted trading brokers, you can still make some losses once in a while. So you have to approach forex trade with an open mind. Forex is popular because it is a source of passive income for many traders.

What Are Forex Pairs?

When you are trading currencies, you’ll see them paired up. For example, you may have USD/JPY, EUR/USD, or USD/CAD. A pair such as USD/JPY represent US dollars against Japanese yen.

These currency pairs have their associated prices. If the price associated with USD/CAD is 1.2987, it means one US dollar will cost 1.2987 CAD. If the price for the pair changes to 1.3456, then one US dollar will now cost 1.3456 CAD. The prices associated with these currency pairs are referred to as quotes, and it is these quotes that the top-rated trading platforms are interested in.

Spread

Each currency pairs on a trading platform have two prices. One of the prices is the “ask price” or the price at which you buy the currency. The other price is known as the “bid price.” This is the price at which you sell the currency. The “bid price” is usually lower than the “ask price,” and the difference between these two prices is referred to as the spread.

A wide spread means there is high volatility and low liquidity in the market, while a low spread indicates high liquidity and low volatility in the market.

There are many terminologies associated with the forex trade. You’ll find them listed and explained on the websites of the best online investment brokers