It is similar to the stock exchange, where you trade shares of a company. Like the stock market, you don't need to take possession of the currency to trade.
Investors use forex trading to profit from the changing values of currencies based on their exchange rates. In fact, the foreign exchange market is what sets the value of floating exchange rates.
What Is Forex Trading And How Does It Work
All currency trades are done in pairs. You sell your currency to buy another one. Every traveler who has gotten foreign currency has done forex trading.
For example, when you go on vacation to Europe, you exchange dollars for euros at the going rate. You are selling U.S. dollars and buying euros.
When you come back, you exchange your euros back into dollars.
You are selling euros and buying U.S.dollars.
The most familiar type of forex trading is spot trading. It's a simple purchase of one currency using another currency.
You usually receive the foreign currency immediately. It's similar to exchanging currency for a trip.
It's a contract between the trader and the market maker, or dealer. The trader buys a particular currency at the buy price from the market maker and sells a different currency at the selling price.