What is forex and forex trading?

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If you have ever travelled to a foreign country, you may have needed to exchange your money for a different currency. If so, you have already participated in forex trading. “Forex” is the short form of foreign exchange. It can also be referred to as “FX” and currency exchange.

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.

Currency exchange dollars to yen cars

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 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.

The value of a currency will increase if there is a higher demand for it, causing a change of its exchange rate against other currencies.

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.

Successful trading means using the exchange rate to make a profit

Here is an even clearer way of showing this principle using the same example:

As the exchange rate of a currency pair changes, so does the cost for purchasing one currency with another. For example, let's say you changed €500 and got back $700 while on holiday. If you come back and the exchange rate changed from $1.40 to $1.30, you would receive €538.5 for a €38.5 profit.

Let’s say that you changed your €500 into US dollars and got $700, but you did not spend any money at all and came back with $700. After the exchange rate changed from $1.40 to $1.30, instead of getting €500 back, you actually receive €538.5. You have gained €38.5 simply from holding your money in dollars while the exchange rate changed. This is essentially how we trade in the currency market. We buy a certain amount of a currency, hold onto it until the exchange rate fluctuates, then change it back once the exchange rate has fluctuated, making money in the process.

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Trading to suit your lifestyle

Trading in the currency market means buying a certain amount of a currency, holding onto it until the exchange rate changes, then changing it back again when the exchange rate changes for a profit.

Using a bureau de change and saving a bit of money from your holiday budget is not a practical approach to forex trading. Fortunately, there is an easier way to do this: through online exchange offices called “brokers”.

What this means is that you can exchange currencies online and take advantage of the constantly changing exchange rates. Just like in the example of going on holiday, you can buy different currencies and make a profit as the exchange rates between the currencies change – this is trading the forex market.

Trading forex online has many benefits:

Trade alongside your job

  • You can trade forex from your home or anywhere you have an Internet connection.
  • The forex market never sleeps. It is open 24 hours a day during weekdays and can suit your daily routine.
  • You do not need a huge budget to get started. As little as $150 is enough to begin trading and building your account over time.

Trading forex will not make you rich overnight, yet it can provide an income stream alongside your normal job. It can even turn into a business, depending on how much time you are willing to invest.

Of course, it will require some effort to get there, but this is exactly what tradimo is here for – to help you learn how to trade in a way that will suit your individual lifestyle and to help you navigate your way through the forex market.

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