If you have heard about forex trading and are interested in learning more because you are aware there some forex traders make huge amounts of money but you don’t know what exactly it is – then keep reading! I’m going to be explaining exactly what forex trading is and why it’s done.

Forex is two words merged together FOREIGN and EXCHANGE. Take the first three (or four) letters of the first word and the first two of the second and you have FOREX.

It’s when two currencies are traded against each other. So you’ve probably been an amateur forex trader when you’ve gone on holiday and traded your home currency for the foreign currency so that you can spend money whilst you are abroad. When you’ve done this you’ve probably been aware that there was an ‘exchange rate’ which was either ‘good’ or ‘bad’. Good meaning you were going to get a lot for your money or bad meaning you weren’t going to get much at all. If you had a ‘good’ deal it would have meant your home currency was stronger then the holiday currency and if you had a ‘bad’ deal it probably meant that your home currency was weaker then the holiday currency. Maybe someone even advised you to exchange your money at a certain time in order to get a better deal.

Foreign exchange doesn’t just exist so people can go on holidays. It’s also used for companies who want to exchange goods and services around the world. If a country generates a lot of wealth then the value of their currency may go up. Or if there is some terrible natural disaster or terror attack then the value of a currency may go down. A great example is how the Pound plummeted following the decision for Britain to leave the EU in 2016. The likely explanation is that there was a lot of uncertainty and people were not sure how this decision would affect the future of the Pound and therefore may have made a decision to exchange it to another currency causing it to weaken and drop in value. This is supply and demand on a large scale.