What is Forex?

Before I began my internship at FXCM about three months ago, I had absolutely no prior knowledge of what foreign exchange market is all about. On my first day at FXCM, I was so puzzled by the new terminology and aspects of FX trading that I began feeling extremely overwhelmed. Forget trading and technical analysis, I literally did not know the logic behind forex trading. I took a deep breath, and gradually learned the following basics:

• Both forex and FX are acronyms for the Foreign Exchange Market. The FX market is the largest and most liquid financial market with an estimated daily volume of 1.5 to 2 trillion dollars A DAY. That number that isn’t only difficult to comprehend, it isn’t even comparable to the volume of equity trading.
  
  
• In the FX market, traders buy and sell currency pairs in attempt to make a profit from the exchange rate fluctuations. When you buy a currency pair, you hope the price will go up, giving you the option to sell at a profit. When you sell a currency pair, you hope the price to go down, enabling you to buy the currency pair back at a lower price. Trading forex can be highly profitable, but it also poses great risks. Just like with equities, at certain times, some currencies are riskier than others. Signing up with a broker is as easy as filling out an application, and depositing funds online. However, don’t underestimate the challenge. Even though it’s an easy market to enter, it’s not for everyone. Before depositing real cash you should consider whether or not this is really for you, and the way to do that is to practice on a demo account (like I am with FXCM. Click HERE to register your own free demo.)
  
  
• Currency Pairs
  As I just mentioned above, currency trading is carried out through the buying and selling of currency pairs. Currency pairs? What are those? Consider an example of a currency pair, the EUR/USD. The reason forex trading is done using currency pairs is because the way to value a certain currency is by comparing it to another currency. Or in other words, how many US Dollars do I need to buy one unit of the Euro? The first currency in the pair (EUR) is referred to as the Base Currency, while the second currency in the pair (USD) is the Counter Currency (aka the Quote Currency.) The price that you see for each currency pair is the current exchange rate for the given pair. That rate is different for the buy/sell, and the reason for this is explained in the next section. The exchange rate refers to the amount of the counter (USD) currency that can be exchanged for one unit of the base (EUR) currency. For example, if the EUR/USD is 1.3529, then one Euro costs $1 dollar 35 cents and 29 hundredths of a cent.
  
  
• The Spread
  Now you may wonder, just like I did, why the buy and sell prices for a given currency are different? Isn’t there supposed to be only ONE exchange rate? In forex trading the difference between the buy and sell prices is the way forex brokers make their money. The spread is defined as the difference between the buy and sell price, and is also known as the bid-ask spread.