You may have heard it called “the foreign exchange,” “FX,” or “forex,” but they all mean the same thing—a massive, 24/7 global marketplace where traders exchange national currencies for profit. Forex markets tend to be the biggest and most liquid asset markets in the world. According to a Nasdaq.com report, forex trades $5 trillion per day—that’s around 25 times more than all the world’s stock markets combined on any given trading day.
So, what is forex, and how does it work?
IM Academy has the answers.
Put simply, foreign exchange trading simply means trading one currency (such as the United States Dollar) against another currency (like the euro).
Here’s an example: Say that Joe travels from Hoboken, New Jersey, to Vienna, Austria.
Joe wants to visit The Hofburg, Vienna’s storied palace, but he learns that he must exchange his U.S. dollars into euros to pay for his entry. Joe exchanges $100 for roughly 85 euros—the current exchange rate. Suddenly, Joe gets an urgent call that he must immediately return to New Jersey. When Joe gets back to the airport, he remembers to exchange his unused euros for dollars. Before fees, Joe receives $105 for the 85 euros—$5 more than he originally paid for them. In this case, the dollar’s value went down against the euro while Joe was holding them. So, when he traded his currency in for the dollars, he received $5 more than his original investment.
How does forex trading work?
Unlike the New York Stock Exchange, the foreign exchange market is open 24 hours a day, Monday through Friday. This is necessary so that trading can go on worldwide and accommodate different countries’ trading sessions and business hours. Where is the forex market located? Even though forex trading can be segmented into peak trading times in Sydney, Tokyo, New York, London, and other major financial centers—there is no central location for the market itself. The forex market is a decentralized over-the-counter (OTC) market made up of complex computer networks and trading terminals worldwide.
Currencies have three-letter codes, kind of like a stock’s ticker symbol. You’ve probably seen some of these, even if you didn’t realize it. The U.S. Dollar is USD, the Canadian Dollar is CAD, and the euro is EUR. Every currency on the market—from the Japanese yen (JPY) to the Swiss franc (CHF)—has its own unique three-letter code. Forex trades are always expressed as a combination of two currencies. Our friend Joe, for example, traded the currency pair: EUR/USD.
The forex market moves much faster than the stock market. While investors may hold onto stocks for months or years, it is rare for an investor to hold the currency for more than a few days—even hours. While this highly liquid market introduces the opportunity for more profit to investors, it also brings more volatility. Before the internet, forex trading was much more difficult for an individual investor. Currency trading was dominated almost exclusively by hedge funds, multinational corporations, and high-net-worth individuals with lots of capital.
Thanks to the internet, this is no longer the case. In IM Academy’s FRX forex trading program, students learn much more detail about spread, pip values, and their uses in forex trading.
But simply put: The spread is the difference between the buy price and the sell price of an underlying asset. This helps traders calculate the cost for a trade and serves as an indicator of the underlying asset’s volatility. Generally, during peak trading hours, assets available on the forex market are highly liquid with narrow spreads when compared to the stock market.
But the forex market is highly variable depending on the currency, the time of day of a trade, and economic conditions.
There is indeed a lot of volatility in forex trading. Much more so than in regular markets.
Dealers in the forex markets also allow a high amount of leverage. This can get very risky, as traders can control much larger positions than they might be able to afford on their own. In forex trading, leverage in the range of 100:1 is not uncommon. And given the global nature of currency trading, a successful forex trader must understand the economies and workings of various countries and their connections to other countries and entities that might influence and drive currency values.
One of the best ways to find out if forex trading is the right choice for you is to enroll in IM Academy and learn everything you can about the methods, strategies, and underlying fundamentals that have made previous traders successful.
IM Academy is currently offering a deep-dive forex trading training program called FRX, where students learn how to understand currency movement, the different types of chart analysis, how foreign markets operate, and the best strategies to enter into trades in the forex market.
You can learn more about the FRX Academy training opportunity at IM Academy’s website.
Note: IM Academy is an educational forum for analyzing, learning, and discussing general and generic information related to markets and strategies. IM Academy does not provide personalized recommendations or views as to whether an investment approach is suited to the financial needs of a specific individual. Before deciding to participate in the forex or other markets, you should carefully consider your investment objectives, level of experience, and risk. Most importantly, do not invest money you cannot afford to lose. You should take independent financial advice from a professional in connection with, or independent of, research and verify any information you find on the IM Academy website.