There are only about 6 things to know about anything, or any topic, to understand it. It is the same with forex.
But I would add a 7th question because it has such a big influence on fx traders. More about that later.
What is forex and forex trading?
Forex is the collective name for the different currencies of the countries of the world. Fx trading is the buying and selling of these currencies. The forex market is a global, decentralised market in which these currencies are traded. It is the largest market in the world.
Why does fx exist?
Forex trading is necessary because countries, businesses, and individuals in different countries, need to trade with each other.
When a South African buys a book from Amazon in the US, the buyer must pay in US Dollars (USD). Amazon in the US does not need Rand (ZAR), they want USD. So the buyer uses ZAR to buy USD. It means the book buyer must sell ZAR to buy USD.
The money exchange from ZAR to USD, happens on the forex market.
Who uses forex trading or who participates in the fx market?
The main users of forex are companies and individuals that participate in world trade by buying and selling across borders. They use banks to facilitate their transactions, which makes banks the big players in the fx market.
When does forex transactions occur?
Forex transactions occur every time someone has to exchange one currency for another.
In trading, it occurs every time someone buys or sells a currency.
Where does fx trading happen?
Forex trading transactions happen on the world fx market which is an electronic “place” where buyers and sellers meet to do business but, in general, it happens anywhere people exchange currencies.
How is fx used?
In addition to what I explained above – forex as a facilitator of world trade – a spin-off of the forex market has developed where people, and institutions, speculate on the movement of currencies in relation to each other, in an effort to make profit.
That is the market we refer to when we talk about forex trading.
The seventh question which many consider as the most important, is the result of generally accepted statistics which indicate that as much as 98% of forex traders are not profitable on a consistent basis.
What accounts for the large number of unsuccessful forex traders?
There are as many answers as there are traders, but most commentators will probably include these in their replies: