What is Forex?

Forex is a market of currency pairs.  Over a trillion dollars gets traded back and forth every day between these currency pairs.  The most prominent one right now is EUR/USD.  This is the exchange rate between euros and US dollars.  At this moment, it’s trading around 1.4100, which means each euro is worth $1.41.

When trading forex, you can buy, called a long order, or sell, called a short order.  When you buy, in this case you spend dollars to buy euros.  When you close the trade, you sell those euros to get dollars back.  The difference in price multiplied by how many euros you bought determines how much profit or loss comes from that trade.  If you’re selling, you’re selling euros for dollars, and when you close the trade you buy euros back.

In short, you buy if you think price is going up and you sell if you think price is going down.

Unlike equities, forex is not traded on an exchange.  This means that there are several small forex “pools” where brokers link traders.  This lack of a centralized exchange means that prices may vary from broker to broker.  They tend to stay pretty close outside of high volatility events such as news releases.  This also means that there are shady brokers out there that cheat their customers.  Before choosing a broker, do your research and make sure they’re legit.

Generally, forex brokers do not charge commissions for trades.  The brokers make their money from the difference in the buy and sell price.  This difference is called the spread.  Most brokers try to keep their spreads small and consistent to attract customers, but always check the spread when you place an order, especially during news releases.

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