Forex what 2

What is forex trading and how does it work?

Interested in learning about forex trading? Take a look at everything you need to know about the forex market and how it works, as shared by the experts at Axi.

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What is forex trading?

Forex trading is the act of buying and selling currencies.

In any forex trade you need to choose two currencies and speculate that one will rise or fall in value, relative to the other. For example, let’s say you think the US dollar (USD) will strengthen compared to the Euro (EUR). If it does, you earn a profit. If it doesn’t, you take a loss.

'Forex' or 'FX' is short for foreign exchange, while 'forex trading' refers to the act of trading on the foreign exchange market.

How does forex trading work?

The forex trading market is not a physical marketplace. Instead, it’s a decentralised global network that operates 24 hours a day, five days a week. In the forex market, traders buy and sell ‘currency pairs’ based on the value they have against each other.

Example of a forex trade.

Here’s an example of a forex trade with the AUD/SGD currency pair:

Let’s say you are planning to travel from Singapore to Australia. So that you can spend local money when you arrive, you convert some Singapore dollars (SGD) into Australian (AUD) dollars.

The exchange rate at the time is $1 AUD = $ 1.04 SGD. Therefore, you spend 100 Singapore dollars to buy $96.15 Australian dollars. Your ‘currency pair’ is AUD/SGD.

Now let’s say you stay in Australia for a week but don’t spend any of the cash you brought with you. On the way home, you can change it back into Singapore dollars.

However, the market has now changed. Now, $1AUD equals $1.10SGD. The Singapore dollar has increased in value. Now, your $96.15 Australian dollars will buy $105.76 Singapore dollars.

You have made a profit because of the change in the value of each currency.

This is an example of a real-world use case. The only thing is, when you trade on the forex market, you are making a similar transaction without the need of travelling. Forex traders are opening these position from home, or anywhere in the world, by using a forex trading account.