Forex, also known as foreign exchange, FX or currency trading, is an OTC (Over the Counter) market, by far the largest and most liquid market in the world with daily trading volumes in excess of $5 Trillion.
That’s more than the daily traded volumes of the world’s combined stock markets. The sheer size of the forex markets makes for trade opportunities that are simply not available for other markets.
Forex trades are made in pairs. That is to say a forex trade involves the buying (or selling) of one currency while simultaneously selling (or buying) the equivalent amount in a different currency.
Take for example the EURUSD. This is the Euro versus the United States Dollar. If one Euro is equivalent to 1.10000 United States Dollars, then the EURUSD would be at 1.10000
If a Buy trade is taken for the EURUSD then the trader is buying Euro while at the same time selling the equivalent amount in Dollars. A Buy trade for example for one standard lot of EURUSD would involve buying 100,000 Euro and selling 110,000 United States Dollars.
Forex trades involve two legs. Opening and Closing. In our EURUSD example, we entered our Buy trade as we believed the value of the EUR would rise. Let’s say the EURUSD rises to 1.20000. Our 100,000 EUR is now worth 120,000 USD, so closing the trade would result in a profit of 10,000 USD.
Forex is a leveraged trade, which offers substantial opportunities to magnify trade size and potential profits. Leverage can also work against you in the event your trades are on the losing side. It is important to use leverage wisely and never overextend your trading.