- Most countries each have their own currencies, and each country has to interact with other countries through foreign trade (export and import) and investment. Each country would also like to sell their products in their own currency. This means that if I, a Nigerian, want to purchase/import a car from a seller in the United States, I need to exchange my Nigerian Naira (the currency of Nigeria) for US Dollars in order to pay the US exporter (the car seller). Likewise, if a US buyer/importer wants to purchase Nigerian cocoa, they need to exchange their dollars for Naira to pay the Nigerian cocoa seller. You can also apply this principle of foreign exchange to investments: if a Nigerian investment company wants to buy an asset in the US (e.g. real estate), then it needs to exchange naira for dollar to pay the American seller.
- But currencies have prices. The price of a currency, its exchange rate, determines how much naira one needs in order to buy a dollar. So right now one US dollar can be exchanged for 197 naira. Just like the prices of milk, butter, and all other goods and services, the price of one currency in relation to another is determined by the demand and supply for that currency. So, holding other factors constant, if more people are demanding for US dollars (i.e. more people are buying the dollar), the price of the dollar (its exchange rate) rises in the foreign exchange market. For instance, if investment opportunities in the US increase, more investors would want to invest in the country; this makes these investors demand more for US dollars in order to buy investments in the country. This then raises the value of the dollar.
- Forex (short for foreign exchange) trading
simply involves attempting to predict changes in currency exchange rates
in order to profit from these changes. Just like how you would
naturally want to buy a house for $100,000 today if you believe it will
appreciate in value to $150,000 next year so you make a $50,000 profit,
the forex trader may predict that the US dollar will appreciate in value
soon, and so he/she buys the dollar. Then when it eventually
appreciates, he/she then sells it to make a profit. Exchange rate quotes
typically appear in the form USD/NGN (base currency/counter currency).
So you might see:
USD/NGN = 197
EUR/USD = 1.10
These mean that 1 USD buys 197 naira; and 1 Euro buys 1.09 dollars. - A
forex trader can analyze the EUR/USD market and come to the conclusion
that the Euro will soon strengthen/appreciate against the dollar. So if
he/she places a buy order on the EUR/USD, and the exchange rate does
indeed rise to, say, 1.50, then the trader can now close this trade with
profit. So the forex market then involves the participation of
international goods and services traders, international investors,
currency speculators (forex traders) and, occasionally, central banks.
This is why on average about $5 trillion in trades is made in a single
day in the forex market.
So to be a forex trader, you first need to learn the fundamentals of the forex market more comprehensively than I have explained here. You must then learn techniques for predicting exchange rate movements.
Source: quora.com