What is Forex?

What is Forex? This is a common question because the answer reveals one of the many ways to make money online. Forex is an acronym for the Foreign exchange market. It is where different financial institutions, businesses, and investors come to exchange or speculate on currencies.

In simple words, Forex is all about the exchange of different currencies in the world. Since there are several currencies available for trade, no other market is as large as the foreign exchange market. In fact, it is the largest and most liquid market with a turnover of over 3.98 trillion dollars.

HOW IS FOREX TRADED?


Currency exchange can take place offline and online. This means you can exchange currencies physically and with the use of the internet. If you cannot use your currency in other countries, you can exchange it before you travel or when you arrive.

Let’s say you live in the United States and you’ve planned a vacation to Switzerland. That means you will convert your dollars to Swiss franc to pay for anything in Switzerland. If the exchange rate for the dollar to Swiss Franc is 1.2095, it would cost 1.2095 to buy a dollar.

Therefore, if you are to convert 500 dollars to Swiss franc at that exchange rate, you’ll get 605 Swiss francs. You have turned your domestic currency into another currency at given exchange rate. This is one half of the transaction.

Let’s say the exchange rate changed from 1.2095 to 1.1000 during your stay in Switzerland. If you convert 605 Swiss Franc at the new exchange rate (1.1000) back to the dollar, you’ll 550 dollars. Wow! You’ve made a profit of 50 dollars, and this is because while you held on to the Swiss Franc, the exchange rate changed in your favor.

This is how Forex works offline and online. Using the Internet and exchange platforms, you can buy and sell currencies simultaneously from the comfort of your home. The online Forex market is open 24 hours a day, 5 days a week.

They write currencies in symbols on online platforms. For example, you’ll see Symbols like USD for U. S dollar and CHF for Swiss Franc. You will learn more about currency symbols and exchange rates in preceding lessons.

Being a Forex trader is all about speculating on the price of different currencies. For example, if you think the United States dollar will rise against the Japanese Yen, you can buy the USD against JPY, and if the price rises as you expected, you’ll make a profit.
  

THE MAJOR PARTICIPANTS IN FOREX


Large international banks and financial institutions are the major participants in Forex. The banks rely on small financial institutions also called dealers who trade in large quantities.

Banks and financial institutions or dealers do their transactions behind the scene, hence the term ‘interbank market’. This is where the larger trades involving hundreds of millions take place. Some major market participants are Citi, JP Morgan, UBS, Deutsche Bank, Barclays, HSBC, and XTX markets.

Commercial companies also play a vital role in the foreign exchange market. They usually trade fairly small amounts as they seek foreign exchange to pay for goods and services. Their activities may not affect the exchange rates in some cases.

The other participants in Forex are individuals or corporate investors like you. To take part, they must go through retail Forex broker like Tenkofx. A retail broker is a firm that handles a tiny volume of the overall market and provides traders with access to a trading platform. Individuals cannot take part in Forex without retail brokers. You will learn more about the operations of a retail broker in preceding lessons.

WHY SHOULD YOU TRADE FOREX?


There are several reasons to trade Forex to make money. Here are some of its advantages:

High liquidity and high volatility

Liquidity means there is a lot of money fluctuation in the market - over 5.3 trillion dollars a day. As a result, it takes a fraction of seconds to open and close positions. Volatility means exchange rates are unstable and you can profit on the moves of the price anytime you like.

Online trading


People trade Forex on the Internet; there is no physical location where traders go. You need to download the Tenkofx special software called Metatrader 4 from the website or use a web trading terminal. A broker’s online platform will connect you to real-time quotes for different currency pairs.

The Forex market is open 24 hours a day, 5 days a week - from Monday morning till Friday night. You don’t have to wait for physical trade sessions like when trading stock - trade when you have time.

Lower cost of trading


Forex trading is less expensive to trade compared to stocks. For example, good a Forex Broker charge 0.1 pips for each deal made on EURUSD pair. Other fees include swap and fund withdrawal, which are almost insignificant.

Use of Leverage


The ability to use leverage provides you access to trading with bigger amounts of money than you have on your deposits. For example, if the leverage is 50:1, it means for every dollar you have in your account, you can control 50 dollars in the market. Thus, the leverage increases your potential profit. If the price does not move in your favor, the amount you lose will also be higher due to the leverage you applied.