What is Forex

• Forex, short for Foreign Exchange, is the global market for trading currencies. It’s the world’s largest financial market, where participants buy, sell, and exchange currencies at current or determined prices.
  

What is Forex? (Simple Explanation)

Forex (Foreign Exchange) is the market where people buy and sell currencies. Think of it like when you travel to another country and exchange your local money for their currency.

For example:

• If you travel from Jamaica to the USA, you exchange JMD (Jamaican Dollars) for USD (US Dollars) at a money exchange or bank.
• If the exchange rate is 1 USD = 150 JMD, and you give 15,000 JMD, you get 100 USD in return.
• Later, if the exchange rate changes to 1 USD = 155 JMD, and you exchange your 100 USD back, you now get 15,500 JMD—a profit of 500 JMD just from the rate change!

In Forex trading, people do the same thing but online, trying to make money from currency price movements without physically exchanging money.

• Participants: Includes banks, hedge funds, governments, corporations, and retail traders.

How Forex Works

Forex (Foreign Exchange) works by allowing traders to buy and sell currencies, aiming to profit from price changes. It is a decentralized, over the counter (OTC) market, meaning it operates electronically without a central exchange, like a stock market.

. Currency Pairs & Quotation

Understanding Currency Pairs

• In Forex, currencies are always traded in pairs because one currency’s value is relative to another.
• Each pair has a base currency (first) and a quote currency (second).

Example: AUD/USD = 0.6500

• AUD (Australian Dollar) = Base Currency
• USD (US Dollar) = Quote Currency
• The price (0.6500) means 1 AUD = 0.65 USD.
• If this price increases to 0.6700, the AUD has gained value.
• If this price decreases to 0.6300, the AUD has lost value.

2. How You Profit in Forex

Buying (Going Long)

• You buy when you expect the base currency to increase in value.
• Example: If AUD/USD is at 0.6500 and you buy, then it rises to 0.6700, you make a profit because you bought at a lower price.

Selling (Going Short)

• You sell when you expect the base currency to decrease in value.
• Example: If AUD/USD is at 0.6500 and you sell, then it drops to 0.6300, you profit.

3. The Bid, Ask, and Spread

Every Forex trade has two prices:

• Bid Price – The price at which you sell.
• Ask Price – The price at which you buy.
• The spread is the difference between the bid and ask price.
  • Example: AUD/USD Bid: 0.6500, Ask: 0.6502
  • Spread = 2 pips (smallest unit of price movement)

Brokers make money through the spread, so the tighter the spread, the lower your trading costs.

4. Trading with Leverage & Margin

Leverage allows traders to control a larger position with a small amount of capital.

Example of Leverage (1:100)

• You have $1,000.
• With 1:100 leverage, you can trade $100,000 worth of currency.
• This magnifies profits but also increases risk.

Margin

• Margin is the money needed to open and maintain a leveraged trade.
• Example: If you want to trade a $100,000 position with 1:100 leverage, you only need $1,000 as margin.

5. Forex Market Participants

Retail Traders – Individuals trading through brokers.

Banks & Financial Institutions – Move large volumes for clients and themselves.

Central Banks – Influence currency value through interest rates and policies.

Corporations – Use Forex for international trade and hedging.

6. Market Movements & What Affects Forex Prices

The Forex market moves based on supply and demand, influenced by:

✅ Economic Data: GDP, inflation, interest rates.

✅ Central Bank Policies: Rate hikes strengthen a currency; rate cuts weaken it.

✅ Political Events: Elections, trade agreements, wars.

✅ Market Sentiment: Risk appetite, investor confidence.

Why People Trade Forex:

Profit from Price Fluctuations: Traders aim to make a profit by speculating on the future price movements of currencies. If they think a currency will appreciate, they buy it. If they think it will depreciate, they sell it.

Leverage (Magnified Profits)

Forex offers leverage, which allows traders to control larger positions with a smaller amount of capital. For example, a leverage of 100:1 means you can control $100,000 worth of currency with just $1,000 in margin.

• Leverage Explained: If you use 100:1 leverage, a 1% price move could lead to a 100% return on your initial capital (if correctly managed). This means the potential for higher profits, but also higher risks.

• Risk vs. Reward: While leverage can significantly increase profits, it also magnifies losses, making risk management crucial.

• Liquidity: The Forex market is extremely liquid, meaning it’s easy to buy or sell currencies without affecting the price too much.

24-Hour Market Accessibility

The Forex market operates 24 hours a day, five days a week, because it involves countries across different time zones. This allows traders to trade whenever they want without needing to wait for specific stock market hours.

• Key Benefit: You can trade during the day, at night, or even on weekends when major events (like economic data releases or geopolitical events) occur.

• Flexibility: Forex traders have the flexibility to trade at times that fit their schedules, whether they are day traders, swing traders, or those who prefer longer-term trades.

Forex Trading Sessions & Best Times to Trade

The Forex market operates 24 hours a day, five days a week, because it involves countries across different time zones. The market opens on Sunday evening (US Eastern Time) and closes on Friday evening. The major trading sessions are:

• Sydney Session – 10 PM – 7 AM GMT
• Tokyo Session – 11 PM – 8 AM GMT
• London Session – 7 AM – 4 PM GMT (most volatile)
• New York Session – 12 PM – 9 PM GMT