What is Forex Trading? simply explained

What is trade FOREX (currency)?

Forex plays an important role in global financial markets. With a turnover of 5 billion dollars a day, the foreign exchange market is the largest financial market of all. But what is change? In general, foreign currency is a foreign currency. For example, if investors want to buy US government bonds, they must first exchange euros for US dollars. But the currencies themselves can also be exchanged. The following guide serves as an introduction to the subject and explains the important mechanics of forex trading.

What is Trading: History of Forex

We will not go through the entire history of the money market or currencies in this article. Many of you no doubt have one hands-on mentality and want to dive right into the interesting aspects of the forex world. To give an idea of ​​the history, the main events are listed below.

The first coins came into circulation around 1000 BC. AD and has been found in distant China. These coins were mainly made of all kinds of metals like copper, lead and iron. Often they also had a hollow interior, so they could easily be tied on a stick or with a rope.

The gold standard was introduced around 1880. The participating countries agreed to peg the value of their currency to a value in gold. This situation was no longer tenable with the outbreak of the First World War and the US dollar became the main currency for international trade. To date, the US dollar is considered the most important currency. The system could not last because the governments needed a lot of money to finance war and reconstruction.

Bretton Woods is central to the creation of the International Monetary Fund and the World Bank. It is a cooperation agreement between 44 participating countries. A fixed exchange rate has been established between the various currencies. However, small fluctuations of around one percent were allowed. The Bretton Woods Agreement was completely dissolved in 1971.

In fact, the Treaty of Rome of 1958 decided to optimize the economic activity of the surrounding countries. The ambition was to build a “union” across countries. All this resulted in the European Union as we know it today.

What is Forex Trading?

What is trade? Even small investors can trade currencies. However, it is extremely rare that a foreign currency is actually acquired physically. On the contrary, in forex trading the right to a certain currency is bought, but the currencies do not physically change hands. Forex trading takes place through so-called financial derivatives. Settings are especially used here. Simply put, the value of these derivative financial instruments changes in accordance with the value of the currency pair in question. Financial products only simplify currency trading, as currencies do not need to be physically transferred. Many of these financial derivatives have a leverage. This allows traders to move more money through the financial markets than they actually actively spend. This is partly done through normal online brokers, but there are also FOREX brokers who specialize in FOREX trading.

It seems confusing at first glance, but forex trading is quickly explained using a small practical example:

ONE currency trader expects an appreciation of the dollar against the euro. The current exchange rate is 1:1. The Forex trader invests a total of 1,000 euros through his broker. This is exactly where the leverage mechanism comes in. Assume the leverage is 1:10. Then the trader actively moves 10,000 euros on the financial markets. This is made possible by the broker acting as an intermediary. The market develops as expected by the trader. He closes his position, i.e. sells the dollar, at the rate of 1 euro for 0.9 dollars. The trader would now receive EUR 1,111.11 for his USD 1,000 that he actually had, resulting in a profit of EUR 111.11. However, the trader actively moves 10,000 euros on the financial markets. This results in a profit of 1,111.11 euros, ten times the profit that would have been possible without leverage.

The main currencies at a glance

The currencies of large economic areas or important financial centers are most often traded on international markets. Combinations of these are also called “majors”. The most traded currencies in FOREX trading (currency trading / currency trading) are:

  • Euro
  • US dollar
  • Pound Sterling
  • Japanese yen
  • Swiss Franc

Conclusion: Forex trading deals in foreign currency (FOREX)

Foreign currency is a combination of different currencies. These currency pairs can be traded daily on the exchange. But foreign currency is not acquired physically. Currency trading (FOREX trading) takes place almost exclusively through financial derivatives. If you want to trade forex, all you need is a joint deposit with a broker. Professionals can also conduct FOREX trades through specialist FOREX brokers who specialize in these types of trades.

Meta description:

Leave a Comment