What is Forex? The basics of forex made simple

What is Forex?

Forex… What is it? Simply the shortened term for foreign exchange or currency trading. The forex market is the largest, most active and liquid global market for trading available.

Where you find liquidity you will also most definitely find the larger financial institutions plying their trade but don’t let that discourage you from making that first trade.

The very nature of the forex market means it is likely to be as close to a perfectly fair trading environment as possible, the size of your portfolio does not dictate your success but your strategy or a slice of luck likely will.

Forex?

Trade currencies 24 hours a day on the worlds largest market.

What is a forex ‘pair’?

The act of making a forex trade is relatively simple; pick one currency against another. This is what is referred to as a ‘pair’. As all currencies are traded against one another, there are no set values for one currency at a given moment, only its relative value versus another.

Trade GBP/EUR and you are opting to trade the value of the Pound relative to the Euro, trade USD/JPY and you are picking the US Dollar versus Japanese Yen, ZAR/USD would be South African Rand versus US Dollar and so on.

Forex ‘Majors’, ‘Minors’ and ‘Exotics’ you say?

Pairs are placed in these categories based on the volume and liquidity of the currency selected and usually the currencies with the biggest volume will also have the best trading conditions (lower spreads).

The majors include (in order of size) US Dollar, Euro, Japanese Yen, British Pound and the Swiss Franc.

The minors include the Dollars of Australia, New Zealand, Canada alongside the respective Krone of Denmark, Sweden and Norway. Some of the more popular exotics include the Indian Rupee, South African Rand, Saudi Riyal or the Kuwaiti Dinar but there are many more beside.

Depending on the type of currency you wish to trade, and especially if it is one of the more exotic varieties, you will need to find a broker that provides that option. Feel free to check out our ‘best brokers list’ and look for some detail in the exotics area or for your particular country of interest.

Long or short forex, up or down
Long or short, Up or down

‘Long’ or ‘Short’?

Once you have a view on a particular currency, you then have another choice to make. Does your strategy tell you it will increase or decrease relative to your pair partner? This is what is referred to as making your trade ‘long’ or ‘short’.

As an example let’s use USD/EUR; if you are taking a ‘long’ view this means that you expect the US Dollar to increase versus the Euro, go ‘short’ and you are trading the US Dollar to decrease against the value of the Euro. With us so far?

The first currency named in the pair is the one you are selecting as your marker against the second. In the example used above, if the pair was shown EUR/USD, your expected outcome from a long and short call would also be reversed so be careful.

If you are going ‘long’ you are expecting the value to increase, if you are going ‘short’ you will profit if your selected currency decreases in value against the second currency in the pair.

This way, if you have a view on a particular currency, regardless of whether it will go up or down there is the potential to profit from being on the right side of the call.

What are the top tools for beginning forex trading?