What is Forex
‘Forex’ simply stands for FOReign EXchange; in the same way that FX is taken to represent Foreign EXchange. Forex and FX can be used interchangeably.
Forex is the largest financial market in the world, but it is not a physical market, and therefore has no central point. There is no big Forex building in London or New York, or anywhere else for that matter. If you buy one currency using another, whether in your local bank, on an online exchange or at the airport, you are participating in the Forex market. This market covers everything from you buying your foreign currency for your holiday abroad through to large international companies hedging their exposure to the different countries they operate in, and, of course, everything in between.
Compared to the $6 billion a day volume of the London Stock Exchange, the foreign exchange market is far larger - measuring close to a whopping $5 trillion a day in traded volumes. That’s more than 800 times the size!
Speculators in the market readily make up $1.5 trillion of that daily volume. This leaves a whole lot of liquidity for traders to play with (more on liquidity later).
What is Trading?
Trading is simply the process of buying and then selling something with the goal of generating a profit. In Forex trading, we buy one currency using another. This can also be thought of as buying one currency and selling another. If someone buys yen and uses dollars to pay for them, they are buying yen and at the same time selling dollars.
As with all markets, the current price of a currency is based on what the market is prepared to pay for it. In Forex, this is called the ‘exchange rate’ between currencies, often simply referred to as ‘the rate’. The exchange rate is simply a measure of what the market thinks one unit of one currency is worth in a unit of another currency.