What is Forex? Introduction For Beginners.

Intrigued to learn more about Forex?

If you’ve ever travelled to another country, the chances are you have visited a currency exchange booth and exchanged your money into the currency of the country you were visiting. It’s very likely (unless you were 8 cocktails in and trying to exchange your money at the airport) that you noticed a screen displaying different ‘exchange rates’ for different currencies.

For the sake of this article, I will assume you made it to the counter and exchanged $500 into Japanese Yen. That’s 50,000 Yen! Bet you thought you were rich…

money in forex

When you exchanged your money, you essentially participated in the forex market! You’ve exchanged currencies. Or in forex trading terms, you’ve sold Dollars and bought Yen.

Then on your way back home, you stopped by the currency exchange booth again to exchange 500 Yen that you somehow had left over (Japan is expensive!) and you noticed the exchange rates had changed whilst you were away.

The currency exchange booth gave you $6 rather than $5 and you could now afford the super delicious sushi from the van man along the road! Life was good again!

Well, it’s these changes in the exchange rates that allow traders to make money in the foreign exchange market.

Now, let’s think about this on a bigger scale. Forget sushi and think $2,000,000 software instead.

A large international company may need to pay for new software in a different currency. The exchange rate fluctuates continuously so these few pennies here and there add up very quickly. This means that your losses can end up being huge, but it also means your profits can be yuuge (“huge” in Trumpglish).

What is forex?

Forex is short for ‘foreign exchange’ (sometimes abbreviated to just FX) and is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.

That’s trillion with a “t”!

All the world’s combined stock markets don’t even come close to this. And unlike the stocks and commodities market, Forex is a decentralized market. This means that there is no central location and there are no formal exchanges where transactions take place.

forex

Forex is a market that rarely closes! The forex market is open 24 hours a day and 5 days a week, only closing down during the weekend (sleep is not for traders, right?).

forex trader

So unlike the stock or bond markets, the forex market does NOT close at the end of each business day. Instead, trading just shifts to different financial centres around the world.

The forex market can be broken up into four major trading sessions. The Sydney session, the Tokyo session, the London session, and Trump’s favorite time to tweet, the New York session.

Some traders prefer to differentiate sessions by names of the continent. This is known as the ‘forex 3-session system’.These sessions consist of the Asian, European, and North American sessions.

forex trading sessions

The forex markets open in New Zealand on Monday morning, which is called the Sydney session. Makes no sense but we don’t make the rules. It is open every day throughout the week until it closes on Friday at 5 pm EST.

Other than the weekends, there are just two public holidays when the entire forex market is closed, Christmas and New Year’s Day.

How does forex trading work?

To trade forex is to essentially buy and sell currencies – with the aim of making a profit.

Unlike many other financial markets, forex traders can make money on the up when things are going well in the world and also on the down, when things aren’t going so well… But more on that in the next chapters.