what is forex: what is forex

what is forex

Before you can test the waters with a demo account, learning basic information about the FOREX markets is essential.

Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs, for example, the European Euro and the U.S. Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). If you buy the GBP/JPY, you are long the GBP and short the JPY; if you sell the GBP/JPY, you are short the GBP and long the JPY. An account is typically funded with the currency of your resident country. A few FOREX brokers offer the option of funding with a non-local currency.

It is important to understand a FOREX transaction is effectively a spread between two currencies. You cannot simply buy the USD or sell the JPY—the purchase or sale must be in relationship to another currency. This is one of two important facts to remember as we delve into the world of foreign exchange trading.

FOREX means FOReign EXchange. The FOREX (FX) market is a more-than-$4-trillion-a-day financial market, dwarfing everything else, including stocks and futures. Because there is no centralized exchange or clearinghouse for currency trading, the FOREX market is currently less regulated than other financial markets.  The FOREX (FX) market is also more than three times the total amount of the stocks and futures markets combined and almost a doubling in the past five years.
Unlike other financial markets, the FOREX spot market has neither a physical location nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency against another. The lack of a physical exchange enables the FOREX market to operate on a 24-hour basis, spanning all time zones across the major financial centers. This fact—that there is no centralized exchange—is the second important fact permeating all aspects of the FOREX experience.

There are a wide variety of reasons to consider FOREX trading, including high leverage and low costs. The ability to set one’s own trading times, lot sizes, and time frames makes it a something-for-everybody opportunity. Access to the FOREX markets on the Internet has resulted in a great deal of interest by small traders previously locked out of this enormous marketplace. Always remember these two important points: (1) FOREX has no central clearinghouse and (2) a currency transaction is a spread between two currencies.

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