What is forex trading
Forex or foreign exchange market, as it is formally called, is a decentralized marketplace for trading national currencies on a global level. The bulk of the trade is made between large banks all around the world, through intermediary companies, which make up the interbank currency market.
However, a considerable share of currency trading is also made by individual or corporate buyers and sellers of different levels, which makes the entire market very active and decentralized.
How does forex trading work
Forex owes its existence to the floating currency rate principle, which was adopted after decades of fixed exchange rate regime dictated by the Bretton-Woods monetary management system. Thanks to the floating currency rates and free currency trading, the exchange rate for any currency in the world is determined by how much of it was sold or bought, i.e. by the demand and supply for the currency.
For example, a US trader imports goods from Germany by paying Euros while their income is reflected in US dollars. This simple currency exchange operation is exactly what powers the global foreign exchange market and given the number of such operations carried out on a daily basis, you can easily imagine how active and huge the Forex trading really is.
By current estimates the overall daily amount of Forex operations is around $5 trillion, and each buy-sell operation has its influence on the exchange rate of every currency in the Forex market.
Most experts agree that the Forex market is the closest thing we have to perfect competition market if not for the national central bank involvement, which serves to assure the liquidity of national currencies to a certain degree.
At the same time some of its features such as lack of trading centers or superior regulation, around the clock trading, financial leverage and geopolitical dispersion really make the foreign exchange market a truly global and independent trading platform. And what's really great about it is the fact that virtually anyone can participate in the trading process and use the constant currency exchange rate fluctuation to generate revenue.
Is forex for dummies?
For a person who has never dealt with Forex it may sound strange that the difference in rates can serve as a source of revenue. However, most people deal with exchange rates when looking at daily rates set by the banks for every currency they buy or sell.
But even when you get to compare several commercial banks you can easily observe that their exchange rates are not identical, and if you buy some currency at one bank and sell it in the other you can actually make some money off this simple speculative operation.
Now imagine a situation when the exchange rate is changing constantly and you can buy or sell virtually all types of currency at any given moment and with much better revenue thanks to the financial leverage provided by trading platforms. That's Forex in a nutshell.