What is Forex?


FOREX is the acronym for “Foreign Exchange” and is also known as “FX”. It refers to currency markets or retail off-exchange.  The FOREX is a $4 trillion dollar market, which is an enormous market compared to all the United States exchanges (Commodities, Futures, Stocks, etc) COMBINED. Some of the major players that make up a significant portion of the FOREX market are central banks, commercial banks, investment firms, multinational companies, hedge funds, retail Forex brokers, and speculators such as you and I.

Have you ever traveled abroad and then find yourself having to exchange your home currency into the currency of your destination country? For instance, let’s travel from London to New York. When we arrive in JFK from LHR, we have to exchange our London currency which is the British Pound (GBP) to US dollars (USD).  When we make this exchange we have just participated in foreign exchange, of sorts.  So in other words, when we arrived in New York, we converted our British Pound (GBP) to US dollars (USD).  And of course there is a small premium that is marked up when we make this exchange. In FOREX, this is called the spread or you can think of it as a commission too.

Currencies are traded against each other. Like our above example when we arrived from the UK to the USA we sold our British Pounds (GBP) in exchange for US dollars (USD). If we wanted to make this trade through our forex broker we would have went short (sell) the GBP/USD. In other words, we sold the GBP and purchased the USD.  In this example we would simply say we went short the GBP/USD and hopefully the GBP/USD moves down in value so you can make a profit just like the chart below.


Remember currencies are traded against one another. So you will always see quotes similar to the one below:


As you can see from the above quotes board you have what is called a “bid” and “ask” just like in any other market. The difference between the “ask” and the “bid” is called the “spread”. The “ask” (or “offer”) is simply what you pay to buy the particular pair and the “bid” is what you sell it for.

Forex is a 24 hour market that is open from Sunday 5PM EST to 5PM EST Friday non-stop. There are three major sessions within this 24 hour interval. The three major trading sessions are as follows:

Asian session
European/London session
USA session

You can pick and choose the session you wish to trade that fits your schedule. Some traders only trade the first couple hours of a particular session, some will trade the London/US overlap and others will trade though out the London session.