What is forex trading?
The forex (also known as FX or foreign exchange) market refers to the global marketplace where banks, institutions, and individuals speculate on the exchange rate between fiat currencies.
The forex market is the largest financial market in the world.
How does forex trading work?
As a forex trader, you are speculating on whether one currency will rise or fall in price against another currency.
So “forex trading” can be defined as the process of speculating on currency prices to try and make a profit.
The value of a currency is influenced by economic, political, geopolitical events, and trade and financial flows.
Placing a trade in the foreign exchange market is simple.
The mechanics of a trade are very similar to those found in other financial markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.
And if you don’t, you’ll still be able to pick it up….as long as you finish School of Pipsology, our forex trading course!
The objective of forex trading is to exchange one currency for another in the expectation that the price will change.
More specifically, the currency you bought will increase in value compared to the one you sold.
Here’s an example:
| Trader’s Action | EUR | USD |
| You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800 | +10,000 | -11,800* |
| Two weeks later, you exchange your 10,000 euros back into U.S. dollars at the exchange rate of 1.2500 | -10,000 | +12,500** |
| You earn a profit of $700 | 0 | +700 |
*EUR 10,000 x 1.18 = US $11,800
** EUR 10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency.
For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
How to Read a Forex Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY.
The reason they are quoted in pairs is that, in every foreign exchange transaction, you are simultaneously buying one currency and selling another.
How do you know which currency you are buying and which you are selling?
Excellent question! This is where the concepts of base and quote currencies come in…
Base and Quote Currency
Whenever you have an open position in forex trading, you are exchanging one currency for another.
Currencies are quoted in relation to other currencies.
Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:
The first listed currency to the left of the slash (“/”) is known as the base currency (in this example, the British pound).
The base currency is the reference element for the exchange rate of the currency pair. It always has a value of one.
The second listed currency on the right is called the counter or quote currency (in this example, the U.S. dollar).
