What Is Forex?

What exactly is Forex?

The foreign exchange market (funds, forex, or FX) trades currencies. It lets banks & other institutions easily buy & sell currencies.

The purpose of the foreign exchange market is to help international trade & investment. A foreign exchange market helps businesses convert two funds to another. For example, it permits a U.S. business to import European goods & pay Euros, even though the business’s income is in U.S. dollars.

In a typical foreign exchange transaction a party purchases a quantity of two funds by paying a quantity of another funds. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods process.
Forex trading

The investor’s aim in Forex trading is to profit from foreign funds movements. Forex trading or funds trading is always done in funds pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a “Forex rate” or “rate” for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. Two year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar.

The investor could now sell the 1000 euros in order to get 1208.30 dollars. Therefore, the investor would have USD 122.60 over what he had started two year earlier. However, to know if the investor made a nice investment, two needs to compare this investment option to alternative investments. At the maximum, the return on investment (ROI) should be compared to the return on a “risk-free” investment. Two example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or reluctant to pay its debt obligation.

Make Profitable Trades today with Forex Trading

When trading currencies, trade only when you expect the funds you are buying to increase in value relative to the funds you are selling. If the funds you are buying does increase in value, you must sell back the other funds in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular funds pair & has not yet sold or bought back the equivalent amount to close the position.

Hopefully you will now know more of Forex Trading & what exaclty it is about.