What Is FOREX Trading and How Does It Work?
Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs, for example, the European Euro and the U.S. Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). If you buy the GBP/JPY, you are long the GBP and short the JPY; if you sell the GBP/JPY, you are short the GBP and long the JPY.
It is important to understand a FOREX transaction is effectively a spread between two currencies. You cannot simply buy the USD or sell the JPY -- the purchase or sale must be in relationship to another currency. This is one of two important facts to remember as we delve into the world of foreign exchange trading.
FOREX means FOReign EXchange. The FOREX (FX) market is a more-than-$4-trillion-a-day financial market, dwarfing everything else, including stocks and futures. Because there is no centralized exchange or clearinghouse for currency trading, the FOREX market is currently less regulated than other financial markets.
By Michael Duane Archer