What is Forex? Here’s an overview

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First, let’s define Forex. Forex is an abbreviation for the term "foreign exchange", which is the largest financial market in the world in terms of daily trading turnover. According to the Bank of International Settlement, the Forex market trades around 5 trillion USD per day. To put this is into perspective, the GDP of the United States is around $18 trillion, which means that the Forex market trades the entire US economy in three to four days! See how to open a forex account in India here!

The Forex market is the marketplace of the world’s currencies. Large companies, governments, central banks, hedge funds, investors, and retail traders exchange currencies every day, though with different objectives. Large companies usually have to take part in Forex to sell their products overseas, governments and central banks operate on the market to stabilise their currencies, while investors and traders want to make a profit from trading currencies.

As you’re probably in the group of traders, we’ll focus on retail currency trading for the rest of this article. Just like stock traders do with stocks, Forex traders make profits by buying a currency cheap and selling it later at a higher price. The difference in the buying and selling price of a currency would be your profit. If the euro vs US dollar pair (EUR/USD) trades at 1.20 and your analysis shows that it could rise to 1.25, you should buy the pair at 1.20 and sell it when the price goes up.

However, in the Forex market you can also make money during downtrends, with a technique called short-selling. When short-selling a currency, you’re betting that the value of the currency will fall in the coming period. Let’s say EUR/USD is currently trading at 1.20 and you expect it will fall to 1.15 – you could short-sell the pair and make a hefty profit of 500 pips (pips are the fourth decimal of an exchange rate).