What is forex?

Do I really have the correct definition of what forex is?  I really don’t know.  The meaning of Forex has been distorted from the glamorous lifestyle it is associated with.  So much glamour has been sold out such that carrying the title of a forex trader is perceived to be very fashionable and important. It is delusional. Forex is everything else other than the stylish lifestyle associated with it in adverts. Don’t get me wrong. This is not to mean forex trading cannot afford you a stylish lifestyle, it can. But it is not a get rich quickly- kind of a scheme.

Forex trading is the largest financial market in the world- larger even than the stock market with a daily volume of about $5.1 trillion. Yeah, a whopping $5.1 trillion in a single day.  It entails the exchange of one currency for another. The value of one currency is measured relative to the other of course after putting several factors into consideration. Some of the things that affect the value of a currency include interest rates, country’s production or GDP, sentiments towards ongoing political situations, future performance prospects among other things.

From the size of the trading activity you can tell that it is a market that provides massive opportunities. However, these opportunities are not easy to pick. It is a complex market that needs clear understanding before venturing in. It is highly volatile meaning it can wipe out your entire investment or life savings in a matter of minutes. Before getting into forex trading it is important to know how it works.

How does it work?

Currency trading (forex) is a 24- hour market that closes at Friday night and opens on Sunday night. There are three main trading sessions broken down into Asian, European and American although they overlap. The currencies are traded in pairs. For example EUR/USD is the pair for Euro against US dollar.  The value of a pair is measured by the units of a counter or the quote currency which is always quoted as the second in the pair. In our example, if the spot rate of exchange for the EUR/USD is 1.1778, it is to mean that to buy one Euro you will be required to have 1.1778 dollars.

The value of one currency to the other keeps on changing depending on so many factors. These changes are measured in pips being the smallest percentage change. It is from such changes that traders make money. Of course there are a lot of things you need to know about this before trading.

If you feel like forex trading is for you, invest a lot in educating yourself about the subject and by practicing. I will be sharing some of the best sites where you can get to learn about forex in my next column. Keep safe!



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