Forex trading (also known as foreign exchange or currency trading) is how individuals and businesses convert one currency into another. Sometimes this is out of necessity, but more often it is speculation on the price movements of currencies in the hope of turning a profit.
Forex is the largest financial market in the world, with trillions of dollars’ worth of transactions taking place every single day. That means that forex prices tend to be very volatile, enhancing the chance of high profits while also increasing risk.
Unlike shares or commodities trading, there is no central exchange used for forex. Instead, currencies are traded 24 hours a day from Monday to Friday across a vast network of banks, dealers and brokers.
How does forex trading work?
Forex prices are quoted in pairs, because you’ll always be trading one currency for another. The first currency in a pair is known as the base currency, and the second is known as the quote currency.
If you are trading euros for dollars, for example, you’ll see the price listed as EUR/USD. If the price is 1.38500, one euro (the base currency) is currently worth 1.38500 dollars (the quote currency).
Forex trading spreads
In reality, you’ll always see two prices when trading forex: the buy price, which is higher than the current price of the pair, and the sell price, which is lower. The difference between the two is called the spread.
If you think the base currency is going to strengthen against the quote currency, you can buy the pair at the buy price. If you think the base currency is going to weaken against the quote currency, you can sell the pair at the sell price.
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