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If you've travelled to another country, you've probably visited a currency exchange booth and swapped your cash for the local currency. If that's the case, you've already dabbled in forex!
But before diving into forex trading, let's understand what it's all about.
What Is the Forex Market?
Forex, short for "foreign exchange" is a global marketplace where different currencies are traded against each other. It's the largest and most liquid financial market globally, with a daily trading volume surpassing $7.5 trillion. To put it in perspective, it's bigger than all the world's stock markets combined!
Unlike the stock or commodities markets, the forex market is decentralized, meaning there's no central location or formal exchange for transactions. Instead, currencies are traded around the world through a network of banks, brokers, and traders.
Plus, the forex market rarely sleeps! It's open 24 hours a day, five days a week, only pausing on weekends and holidays like Christmas and New Year's Day.
How Does the Forex Market Work?
The forex market operates across four main trading sessions: Sydney, Tokyo, London, and New York. Some brokers prefer grouping these into three main regions: Asia, Europe, and North America.
It kicks off in New Zealand on Monday morning (called the Sydney session) and remains open throughout the week until it wraps up on Friday at 5 p.m. EST.
How Does Forex Trading Work?
Now that we've covered the basics of the forex market, let's dive into how trading works.
Forex trading can involve two things:
Currency Exchange: If you're heading to Japan from the U.S. with dollars, you'll need to convert your USD into Japanese Yen. An exchange rate determines how much Yen you'll receive per dollar. For instance, if USD to JPY is 151.19, you'd get 151.19 Yen for every dollar.
Speculative Trading: Here, traders aim to profit from fluctuations in exchange rates between currencies. They make predictions on how rates will change based on economic and political factors. If their predictions are correct, they profit; if not, they take a loss.
Speculative traders use various strategies and tools to analyze trends and predict future prices. You'll often spot them examining candlestick charts and creating trading plans.
To start trading this way, you'll need a forex trading account with a trusted online broker, giving you access to the markets through their trading platform.
Key Takeaways:
The forex market is an over-the-counter marketplace where currencies are traded.
It's open 24 hours a day, five days a week, across three main trading sessions: Asian, European, and North American.
Forex trading can mean exchanging one currency for another or speculating on exchange rate movements.
So, what do you think?
Could forex trading be for you?
If you're curious to learn more, check out the next lesson on the different participants in the forex market!
