Have you ever traveled to another country? No? Assume you are an American who is traveling to Japan. Can you use US dollar in Japan? No you can’t because US dollar is not the currency use in Japan. It is Japanese Yen. So at the airport you usually have to exchange your dollar to the “Japanese yen”. Then you have to go to the money exchanging counter and exchange your US dollar to Japanese yen. Once you receive Japanese yen for your 100 US dollar you will be surprised with the amount of Yen you received for your 100$. You noticed that your 1 US dollar is worth 120 yen and you may feel you are the richest person in Japan. But all your dreams will ruin at the first time you purchase a cool drink from a shop because half of your money is required to buy that. Believe me as soon as do this you have participated to Forex market. How? You have exchange one currency to another one. Simply we are doing the same thing in Forex market. But how it makes profit? Don’t worry I will explain it.
When you return to home you don’t need Japanese yen anymore so you have to exchange Japanese yen in your hand to US dollar. You go to the money exchanging counter and find the exchange rate of “Japanese yen” to dollar and suddenly noticed that exchange rates have changed and now one dollar is worth 100 yen. Is that making you a profit or loss? Definitely it makes a profit to you because if the exchange rate remains same as you exchange money at the first time, you need 120 yen to buy 1 dollar. But now you just need 100 yen to buy 1 dollar. Isn't that a profit to you? Definitely it is a profit and now you know how to make profit in Forex trading. Believe me this is not funny and easy as you think. What will happen if Japanese economy collapses while you are in japan due to an earthquake and if the exchange rate of “Japanese yen” to dollar is 130 now? You have to pay 10 more yen to buy 1 dollar and you have lost some money. Congratulations! Now you know what Forex is. You can make money or lose money with these changes in the exchanges rates in the Foreign Exchange Market. This foreign exchange market is usually known as “Forex”and this is the largest financial market in the world.
Have you ever heard about Stock Exchange? You can hear this when you listen to your local news, the Stock Exchange is up today blah, blah” I think you know about that. Now we are going to compare the largest stock market in the world with Forex market. Do you know what the largest stock market in the world is? It is New York Stock Exchange (NYSE) having a trading volume about $22.4 billion each day. But how it looks compared with Forex market with its huge $5.3 TRILLION day trade volume?
If we used a monster to represent the New York Stock Exchange, it would look like this.
But compared NYSE to the foreign exchange market, it would look like this…
I think you can understand the difference.
Let’s compare the average daily trading volume for the Forex market, New York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange with the graph below.
You can see that currency market is over 200 times bigger compared to stock exchange. That huge $5 trillion number covers the entire global foreign exchange market, BUT retail traders (that’s us) trade the spot market and that’s about $1.49 trillion. Now how do you feel? Do you think you already know everything about Forex market? No we just started out journey. There is a long way ahead. But don't worry I will explain everything you want to learn and what kind of things you have to do to be successful trader.
Then let's take a step forward. What is trade in Forex? Simple answer is money but you are not buying anything physical like you did in previous lesson. Then what you buy? Isn't that confusing?
Assume you are going to buy 1000 yen at current exchange rate assuming Japanese economy is doing well, and will even get better as time goes. Actually you are buying a “share” in the Japanese economy. As you hope after becoming Japanese yen more valuable you sell those “shares” back to the market and you will make some profit.
Actually what we are doing here is comparing economy of one country to the economy of another country.
Now you must have this question. What are the currencies you can trade in Forex trading? Can you trade your local currency in Forex trading? No. Look at the table below.
Take AUD from first column in the table for an example. AU stands for Australia, while D stands for dollar. Hope you understood, right? All Currency symbols always have three letters. You can see that first two letters represent the country and the third letter represent the name of that country’s currency. Why I named the currencies in the above table as “Major Currencies”? Because Major Currencies are widely trading currencies in Forex market.
I think you understood everything in this lesson and if you have any doubt about anything I explained here please let me know. Thanks for reading this lesson and let’s move to next lesson. Bye
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