The ABC Of Forex: What It Is And How It Works

In the past, when I heard of Forex, I visualised a complex form of monetary exchange that governments and major banks engage in, in the course of transacting major international trade payments. This is most likely the picture that most people still have of the same, including you.

But think of it this way; you are travelling to another country, for whatever reason. At the airport, you will have to stop by a foreign exchange booth and convert your local currency to the currency of the country of your destination. At the end of your travel, you will stop by another booth and convert whatever money you will have left back to your countries local currency. By simply doing so, you will have participated in Forex!

What is Forex and How it works

Well, that is the very basic form of this business called Forex or Foreign Exchange, sometimes abbreviated FX. It simply involves exchanging one country’s currency for that of another country, and that is basically what is referred to as buying or selling currencies. For example, if a Japanese guy wishes to visit America, he will sell Japanese Yen to get American Dollars. You can say that he bought American Dollars with Japanese Yen.

Of course there is so much more to this trade than just exchanging currencies when travelling abroad, and yes, much of it is done at the higher levels involving governments and huge financial institutions. In fact, in the recent past, Forex was exclusive to such institutions. As time went by, smaller companies increased in number and there was an increasing need for these companies to transact with foreign companies. For this to happen, they had to do some foreign currency exchange and could only do so via local banks. The trend continued and now with the internet, even individuals, you and I, can take part in this trade.

But what would attract individuals to this trade? Like in any other business, the people who get involved do so with the sole aim of making a profit. You already know that the exchange rates of different currencies fluctuate greatly with time. This is usually the catch for the Forex traders. They buy the currencies that, according to their speculation, are likely to increase in value in the near future.

It may be a bit challenging to figure this out but it will be simpler if we think of it this way; we consider a country as a company. Therefore, someone buying that country’s currency is buying its shares. You can only buy a company’s shares if you believe that the company is doing great, and is likely to keep up the trend even in the near future. So, Forex traders buy currencies of countries they speculate are doing well economically, and are likely to keep that up. They will then sell the currencies as soon as the value appreciates and there, they have their profit.

I hope this has given you a good insight to the nature of this trade. You will learn a lot more in the other articles and by the end of it, you will not only be ready to start making profit in it; you will be eager for that financial freedom Forex can bring you.


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