What is Forex?

Some US Doller Notes

If you are someone who is expecting to learn about Forex or even if you are someone who is already engaged in Forex, our website will be helpful for you to gain knowledge and to improve your knowledge.

Forex is a profitable business, but you should have the correct knowledge, patience, skills and a bit of luck. Learn well, work with a Demo for three months and then invest Real Money. If you become too greedy, it will not be so different from gambling, and you will lose money.

Basically, if you are to earn money from Forex, there is a certain commitment that you should make. It’s not only about committing your time, but you should gain an immense knowledge on Forex, because education is so essential to earn money from this market. If you are just starting, make sure you have the will and dedication, to learn. This market is not suitable for the people who are hoping to be rich in one night.

Keep in mind that this is not a place to convert $100 you invest into $1000 within a day! You should proceed slowly, and gradually increase your capital over time.

What is the Forex Market?

In real terms, it is called the Forex Trading Market. This is similar to the Share Market, which is more familiar to you. One unique feature is, unlike in the stock market, it is not necessary to buy when the prices fall and sell when the prices rise. If the prices either rise or fall, we can earn a profit.

The market goes under the names of FX Market and Foreign Currency Exchange Market as well. When you hear the word ‘market’, it reminds you of a place where goods are sold, isn’t it? How do the people in the market earn money? What they buy for a lower price, they sell it at a higher rate. Likewise, profits are earned at the FX Market from currency of sale.

The word ‘Forex’ has been derived by blending the words ‘Foreign’ and ‘Exchange’. Hopefully, you are getting an idea as to what Forex is, but even if not, keep on reading. In the regular market, which we discussed earlier, if one is to earn a profit, he should buy the goods at a lower price and sell them at a higher price. If so, his profit would be,

Profit = Selling price – Buying price

Buying price = 200
Selling price = 210
Profit = 210-200
Profit = 10

Now let’s see how this relates to the Forex market. If you are going to a country overseas, you require to change the money you have in the currency of that country, isn’t it? For example, suppose you are live in Dubai, and you are willing to visit the United States, you need to convert UAE Dirhams to USD, because, obviously, you cannot do transactions in AED. Most of the people perform this exchange through a bank or a Currency Exchange, which means that they have unintentionally traded in the Forex market. But they are not expecting to earn a profit from the exchange, so it is not much of concern for them.

Let’s now imagine that we are getting ready to go to the USA. Say we need 1000 Dollars. We go to the bank and ask how many AED we need to buy 1000 dollars. The bank will check the exchange rate for the day and will tell us value. You might already know that these exchange rates change on a daily basis (technically they do not change daily, but exchange rates vary every millisecond!).  Let’s imagine today’s USD to AED exchange rate is 150.53. How many rupees would we need to buy USD 1000?

USD to AED Exchange rate: 3.67
Required amount of USD = 1000
Amount of AED required to buy USD 1000 = 3.67 x 1000
= AED 3,670

Keep in mind that to buy USD 1000, we had to spend AED 3,670. Imagine that after three months, we return to Dubai, and by some means, we have earned back the USD 1000 that we took from our country. After arriving in Dubai, we go to a bank and inquire about the USD to AED rate for that day. The bank informs us that the rate is 3.75. Let’s see how many AED we would get for the USD 1000 that we have.

USD to AED Exchange Rate: 3.75
Amount of USD = USD 1000
Amount of AED we receive = 3.75 x 1000
= AED 3,750

Let’s see whether we have accounted for loss or a gain.
Amount we spent for USD 1000 = AED 3,670
Amount we received for USD 1000 = AED 3,750
Earlier we learned that ‘Profit = Selling price – Buying Price’ Let’s see what has happened
Profit = 3750 – 3670
= AED 80

We see that we have gained a profit of AED 80. We did this exchange to fulfil our need rather than to earn a profit. But some people do this with the intention of gaining a profit as well. They are the ones who hold a certain currency until the rate increases, sell them, and earn a profit. That is what happens at the Forex Market. You now might understand how you can earn money by selling money. The story doesn’t end here. In fact, this is where it fun part begins.

From the example that we discussed earlier, you might feel that you cannot earn much. For the AED 5,370 that you invested, you only got a return of AED 80. But Spot Forex, which we are about to learn is different (not much, but, a little). In it, there is a beautiful word called ‘Leverage’. This is what attracts many to Forex. Apart from Leverage, there are a lot of other words you should learn like Pips, Lots, Margins etc. Let’s discuss them in the next article.

If you have any questions, do not hesitate to ask in the Comments Section. I will answer them as soon as possible.

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