Learn Trade: What Is Forex Trading?

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Forex trading in a nutshell:

As you can imagine, forex trading is a bit more than just exchanging currencies for a holiday. Companies use different currencies to buy goods in other countries. In order to buy these goods, they need to obtain the local currency first, just like we would when going on holiday. The difference is that these companies will exchange huge amounts.

With all of the exchanging of currencies happening around the world, the exchange rates are constantly moving. Here is how it works:

Trading currencies is like exchanging money while on holiday:

When currencies are exchanged, they have a certain price: the exchange rate. As with the price of anything, the price for a currency is determined by the laws of supply and demand.

If there is a high demand for a particular currency – for example, many people or companies want to change their domestic currency for the euro – the value of the euro will then increase and the exchange rate will change against other currencies. You can use this principle to make money. To illustrate, let’s use the example of going on holiday.

Say you live in Europe and go on a holiday to the United States. You will want to exchange euros for US dollars. At the time you do this, you get $1.40 for one euro. You exchange €500, therefore receiving $700.

After two weeks, you head home, but you still have $250 left. As you have no use for dollars anymore, you change them back into euros.

You notice though, that the price of the euro against the dollar has changed – the exchange rate is now $1.30 for one euro, so you get approximately €190 back. Had the exchange rate stayed at $1.40, you would have only gotten €180 back. Therefore, you have actually made money.

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