The Foreign Exchange market, also called FOREX or FX, is the global market for currency trading. With a daily volume of more than $5.3 trillion, it is the biggest and most exciting financial market in the world. Whether you sell EUR 100 to buy US dollars at the airport or a bank exchanges 100 million US dollars for Japanese yen with another bank, both are FOREX deals. The players on the FOREX market range from huge financial organizations, managing billions, to individuals trading a few hundred dollars.
On the FOREX market one currency is exchanged for another. The single most important thing with respect to FOREX market is the exchange rate between two currencies (a currency pair). If the economies of the Eurozone are doing better than the US economy, the euro will go up compared to the dollar (EUR/USD ↑) and vice-versa.
Here is an example of a FOREX trade. You decide to buy 1 000 euros against US dollars. Let’s say that currently, at the very moment the trade is executed, the EUR/USD exchange BUY rate is 1.100, so you pay $1 100 for your 1 000 euros.
Some time later, the EUR/USD exchange SELL rate (the rate at which you can sell euros for US dollars) is 1.200. You sell your €1 000 and get $1 200. Having started with $1100, you now have $1200 – you’ve made a profit of $100. Alternatively, the EUR/USD exchange SELL rate could be 1.050. If you sell your €1 000, you’ll get $1 050. Having started with $1 100, you now have $1 050 – you’ve made a loss of $50.
That’s how money is made or lost on the FOREX market.