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Forex Trading For Dummies

Forex (foreign exchange) is an international market dedicated to trading currencies from all around the world. There is no central market needed to conduct trade because everything is done electronically, over-the-counter. This is also the biggest financial market in the world as the need for exchanging currencies is global and constant. In order to conduct business in a foreign country, a company or an individual have to do it in the currency of the aforementioned country. You can’t, for example, pay for anything in euros in the U.S. or in dollars in Italy – you need to exchange currencies and this is what forex is all about. You do that with some help from your broker, but this is the subject of another article.

Forex Trading For Dummies | The Spot Market

Forex trade has three different subtypes of trading – the spot market, the futures market and the forwards market. The spot market is the most common one because it serves as a base for the other two markets and when one talks about forex trade, they most probably mean the spot market. So, what is this market all about? Well, in short it is about trading currencies between two parties according to the current price which represents the ratio of the two currencies in question. Party A gives party B a certain amount of one currency which has already been agreed upon and is reimbursed for that with a specified amount of another currency, depending on the exchange-rate value. The settlement is in cash and these trades usually take two days to reach it. Internet has helped this type of trading immensely by making it faster and simpler and it now stands at the very top of world’s trading industry.

Forex Trading For Dummies | Other Markets

The other two types of trading don’t deal with currencies directly, but instead focus on contracts which represent claims to a certain currencies at some point in the future. The parties signing these types of contracts agree on the price today but the transaction goes through days, months or even years later. The two types of trading are quite similar, with some differences in the way the trading is done. Future contracts, for example, mostly deal with currencies only and have an average length of approximately three months, while forward contracts may include other assets and have a much greater contract length. Futures also specify a standard amount of a currency to be exchanged when the settlement date arrives.

Forex Trading For Dummies | Conclusion

To put it simply, forex trading is trading with currencies. It has three subtypes (spot, forwards and futures) and is by far the largest market in the world. Ever since the internet started to improve our communication and enable us to get in touch with each other on a global scale, the popularity of this kind of trading is constantly on the rise. With time, it grew simpler and faster and today everyone can try to make money through it.

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