New to Forex
Introduction to Forex Trading
What is Forex
The foreign exchange market, also known as forex or fx for short is simply the buying and selling of currencies. It is the world’s largest financial market. It is estimated that US $4 trillion is traded on a daily basis, making the New York Stock Exchange’s daily volume of $25 Billion look small.
How it works
Forex transactions include two currencies- one currency is purchased while the other is sold. In forex trading, traders aim to earn a profit by speculation on the value of one currency compared to another.
Since forex trading is done in pairs, you will see them appear like this: EUR/USD or GBP/CAD. The first currency listed (EUR and GBP in our above example) is called the base currency and the second currency is called the quote currency (USD and CAD in our above example).
Every currency pair has a unique exchange rate. You will see the market’s price read- EUR/USD 1.3400- The base currency (EUR) is always worth one. The quoted price shows how much of the quote currency (USD) you will get for one unit of the base currency (EUR). So in this case 1EUR is worth 1.34USD. Conversely, you will pay 1.34 USD for 1 EUR.
What is your goal
Now that you are familiar with the base and quote currency and the exchange rate let us understand how you can profit from the forex market.
If you believe that the EUR will be strong or appreciate in value versus the USD then you would buy (long) the EURUSD. What you are actually doing is purchasing the base currency (EUR) and selling the quote currency (USD).
However if you believe that the USD will appreciate versus the EUR, then you would sell (short) the EURUSD. What you are actually doing is purchasing the quote currency (USD) and selling the base currency(EUR).
The goal in forex trading is similar to any other form of investing where you aim to “buy low and sell high”.