What is forex trading and how does it work?

Interested in what is forex trading and how does it work? Or just wanting to trade forex? Whether you’re into forex for beginners or are an expert, it’s important to know a few things first. Vault Markets wants you to understand these complex ideas so you can make better decisions.

Forex can be explained as a network of buyers and sellers who transfer currency between each other at an agreed price for a variety of reasons. Usually for commerce, trading, or tourism. 

The foreign exchange market is commonly known as “forex” or “FX” and is the largest financial market in the world. Vault Markets is a part of it. 

To put the size of the forex market into perspective, we can look at the U.S. stock market. The U.S. stock market trades around $ 257 billion a day. So, yes, that is a billion with a “B”. 

Quite a large sum of money by any standards, but this is only a tiny fraction of the forex trades made.

You can trade forex too

There’s a big opportunity for traders to make money. So watch this video to figure out what kind of trader you could be.

Forex is traded 24 hours a day, five days a week by banks, institutions, and individual traders worldwide, only closing down during the weekend. So yes, forex trading in South Africa as well.  The forex market trades around $5.1 trillion daily, making it the world’s most traded market.

Forex is everywhere

Travelled abroad? Then it’s very likely that you have participated in the forex market as you have exchanged one currency for another. In other words, you, too, already trade forex. 

Example:
You exchange your ZAR (South African Rand) for USD (United States Dollar) in anticipation of a long-overdue holiday to the U.S. You have essentially bought dollars with your rands for a specific price. 

Unfortunately, due to unforeseen circumstances, your trip had to be cancelled. So now you need to exchange your dollars back for rands. Sell!

You get a pleasant surprise when you realise that the dollar is worth more now than when you initially bought it, which means you can exchange it for a higher price. You’ve just made more money.   

These changes in the exchange rates allow traders to make money when they trade forex in the foreign exchange market.

So, what is forex trading?

To recap, Forex trading is a type of investing which involves trading one currency for another. Forex traders aim to successfully predict whether the value of a respective currency will increase or decrease compared to the other.

You’re betting on whether the exchange rate between two currencies will increase or decrease. So when you trade forex, you’re trading money – specifically, currencies. Since you’re not taking possession of the physical cash, forex trading can be a little confusing. 

Think of buying a currency as buying shares in a particular country as you would buy shares in a company. The currency’s price is determined by the market’s opinion on the current and future health of the country’s economy.

For example: Let’s say that you buy the United States Dollar. In other words, you’re purchasing a “share” in the U.S. economy. 

You’re betting that the United States economy is doing well and will continue to grow as time goes on. 

Generally, the exchange rate of a currency versus other currencies reflects the condition of that country’s economy compared to other economies.

Want to start making money in the foreign exchange market? Sign up to trade forex with Vault Markets today. It’s FREE!