Forex trading is the conversion of currencies into one another. It’s the largest financial market in the world – and one of the most volatile.
What is foreign exchange?
Foreign exchange, or forex, is the means by which individuals, companies and central banks convert one currency into another. While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken with the aim of earning a profit.
The amount of currency converted everyday – over $5 trillion dollars’ worth – makes forex trading the biggest financial market in the world and can make some currency’s price movements extremely volatile. That volatility is part of why forex is so attractive to some traders: bringing about greater chance of high profits, while also increasing risk.
Why trade forex?
There are many reasons why someone might want or need to participate in the forex market. However, two key activities make up the majority of forex trades.
1. Buying goods or services abroad
This is the form of forex trading that most people are familiar with. Whenever an individual or a business needs to buy something in a different currency, a forex trade must be made. So for practises like international trade, forex is essential.
While forex trades for practical purposes happen every second of every day, they make up a relatively small proportion of all currency trading.
Instead, most forex trades are undertaken with the aim of making money. Traders speculating on forex prices will not plan to take delivery of the currency itself, instead aiming to take advantage of movements in the market.
Major investors can make many large forex trades in a single day, constantly reacting to and anticipating movements in a currency’s price. The relative ease with which currency can be traded makes it a very liquid asset, which is partly why forex can be more volatile than other markets.