Forex is an abbreviation of the word foriegn exchange while forex trading is a business activity of exchanging and buying currencies for profit
The forex market:A market is a place for buying and selling this applies same with forex. A forex market is a place where currencies are traded. For example you buy a British pound with US dollars or you sell Euro for US dollars.
How to trade forex: many people trade forex every day without their knowledge but for a forex trader the main aim is to make profit. Let's say you arrived in New York after a flight from london, and you know you can't use a British pound in New York. You're going to need to exchange some of your British pound into US dollars. You take out £400.00 to exchange. At the airport you see a board displaying
BID ASK
1.2400 1.2500
This is forex, the bid is the amount they are willing to buy your British pound from you and the ask is the amount they are willing to sell you US dollars.
You agreed to exchange and you were given $496.00. you went away to enjoy your vacation. Spending your stay there, you realized that you don't need physical cash, you can do online transactions on everything. After a while, you are ready to go back home you came back to the airport to exchange your money back. You saw this on the same board
BID ASK
1.2200 1.2300
You removed your $496 and gave to the attendant, the attendant returned £403.25 to you. You might think the attendant made a mistake by adding £3 for you. The answer is NO, you made profit, let me explain, During your stay in New York, British pound dropped in value against the US dollars. This means you invested in US dollars rather than British pound and when the value of the British pound dropped you made profit!.
Another illustration: In nigeria, in 2014, $1 was equivalent to #250. As a forex trader you knew that change in government usually affect the value of a currency. You speculated that the naira will drop in value after the next election. You went to the back and bought US dollars using about 2 million naira that would give you about $10,000. Around 2016, $1 became equivalent to about #600, you went back to the bank and exchanged you US dollars back to naira giving you about 7 million naira. You made a profit of 4 million naira. That is how forex traders operate.
Thank you for reading
In my next article I will teach you how to start trading forex.
You must be logged in to post a comment.