Forex (or FX) means foreign exchange. What exactly does this involve? Exchanging one currency for another – it’s as simple as that.
Forex in Everyday Life
You don’t necessarily need to be a trader to participate in the foreign exchange market. Every time you travel and need to exchange some money into a foreign currency, you are participating in it.
Imagine that you have just arrived in New York from Paris. You want to buy a hamburger at the airport, but you only have euros on you. So you’ll need some US dollars if you don’t want to see New York on an empty stomach.
So you go to the first foreign exchange desk at the airport, and exchange your euros into US dollars. Whether you believe it or not, this is the very first step of what we call forex trading.
Wait a minute! You exchanged 10 euros and got back 12. 74 US dollars. How’s that possible? This is the actual exchange rate that made you richer.
After a few days you wave goodbye to the Statue of Liberty and take a flight to Berlin. You exchange your leftover US dollars into euros. Hey, what happened? You got back less than you expected… Why? While you were in New York City, the exchange rate changed. Why? That’s because of inflation, economic changes, and the balance between supply and demand, to only name a few of the factors that can influence the value of a currency.
Be Alert to Changes
Everything changes all the time. So do currency rates.
In a nutshell, keep an eye on when exactly you exchange one currency for another, what currency pair you choose (e.g. US dollars vs. euros) and how much you exchange. Last but not least, how much you profit from the exchange.
The when, how much, what and profit are the basic points of forex trading.