What is Forex? You probably have heard about the word quite often, but do you understand its meaning, its mechanism, or its role in today’s modern economy? A lot of people say that you can generate huge and handsome profit from this financial trade although huge profits mean huge risks too. In case you are interested to know more about this particular market, read further and find out the basic facts about Forex.
Have you ever been in this situation before: you are an American traveling to England, and you find yourself having to exchange your American dollar with Great Britain pounds. Or you are probably a restaurant owner having to import high-quality wine from France, and you find yourself in a monthly routine of exchanging your American dollar with Euro.
What are these examples show you, anyway? The role of Forex, or foreign exchange. We live in a modern world where we constantly need supplies or support from other countries in all over part of the world. Whether you are a traveling tourist in need of foreign currency to help you enjoy your trip or you are a restaurant owner having to import stuff from other countries, you need to exchange your currency with others. That’s the basic principle of foreign exchange, anyway.
In Forex, one currency is being traded for the others, making Forex market the biggest financial market in the world. This is an ongoing market that has never stopped. When a Forex market closes in one area, the other market opens.
In Forex market, we have the so-called traders, who make profits from the price fluctuations of the exchange rates. And how do they do it? They make predictions or speculations of the exchange rates movements – just like what happens in the stock exchange. In the simplest form: they need to buy low and sell high, and the difference in the price is the profit. However, the implementation isn’t that simple or easy, as the practice is quite complicated.
Elements within Forex Market
This kind of market is unique because no one can predict what’s going to happen next. There is no such thing as ‘inside information’ – everything is unpredictable. Yes, you can always predict or speculate the movement, but up until now, there is no solid guarantee that your prediction will always be 100% accurate.
The exchange rate fluctuates unpredictably and the movement is affected by the macroeconomic situation of the world. Things like a natural disaster, political conditions, war, and so many more can affect the rate, so it is totally unpredictable.
In Forex trading, currencies are traded in a pair. If you want to trade your American dollar with Great Britain pound, for instance, your currency pair will be USD/GBP. The trade occurs through OCT (Over the Counter) and interbank market, and through individuals, like between brokers and individuals, banks and broker, or banks and banks.
In Forex, there is the so-called bid price, offer price, and spreads. The bid price is the buying price while offer price is the selling price. The difference in bid and offer price is the spreads, and traders make profits through the spreads.
Traders vs Brokers
A lot of people confuse these two terms, thinking that they are the same. In reality, these two are quite different, both in meaning and function. A trader will analyze all elements within the trading: the movement of the rate, the factors affecting the rate, and so many more. Their job is somewhat complex and complicated.
A broker, on the other hand, is more like a third man, connecting buyers and sellers. The main job is to support the traders and execute the trade. When a trader decides on a particular item to sell (or buy), they will contact the broker with details and order of execution. A trader can be a broker as well, but it is quite rare in most cases. If you are active in Forex trading and you have monitored all the movement, progress, etc, and then you make your own decision whether to buy or sell, it means you are a trader. When you have someone else execute the trade, you have a broker whose job is to assist you.