The Forex market is the largest financial market in the world. There is over $5 Trillion in trade volume, every day!
Just like you have a currency in your country, every other country in the world has their currency too. South Africa trades in Rands, America trades in Dollars, England trades in Pounds, etc. So with all these different currencies all over the globe, how do we compare the values of those currencies to each other?
You see, when you go abroad on holiday, you can’t simply take your money with you and buy things in that country with your currency. You need to have their currency in order transact. I am a South African and have travelled to England on a few occasions. So what I had to do was to use my Rands to buy Pounds so that I could transact in England.
This is where Forex takes place. There was an exchange rate at the time I bought the Pounds. This rate told me how many Rands it would cost me to purchase one Pound. The first time I travelled to England the exchange rate was approximately 14 which meant that one Pound cost me 14 Rands. Today’s exchange rate (21/06/2016) is nearly 22 Rands to one Pound!
So you see, if I had bought allot of Pounds when I went to England the first time at a rate of 14 and I kept them until today, I would nearly have doubled the Rand value because I could now sell them for nearly 22 Rand each!
That is where we as Forex traders make profits from the financial markets. We look to purchase a currency cheaply and then sell it again for a profit, once the exchange rate moves in our favour.
There you have it, Forex in a nutshell. Obviously there is more to it than this, like calculating which currency will weaken and which one will strengthen, but you should now understand what Forex trading is all about.