The foreign exchange market is the global financial market where currencies are traded. It’s global in that most countries in the world participate in this market, in fact trading is just focused at different financial centers around the world at different times of the day. The trading day starts in New Zealand in Auckland/Wellington, then moves to Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally, New York, before trading starts all over again in New Zealand! The constant moving from one country to another means the foreign exchange market is open twenty four hours and five days a week only closing down during the weekend. (Thank God, time for family and church).
Let’s say you are crossing the US-Canada border at Niagara. After you drive over to the US, you realize you have to convert your Canadian Loonie to US dollars, when you do you have just participated in the foreign exchange market. This was a transaction in the “real economy”. Only a small percentage of currency transactions happen in the “real economy” involving international trade and tourism like the crossing at the Niagara border example.
Instead, the majority of currency transactions that occur in the global foreign exchange market are bought (and sold) for speculative reasons. Which segues perfectly into how we make money in the foreign exchange market.
You can make money in this market by taking a position in one currency that you think will be stronger or weaker versus the other. If you are up correct you will make a profit. For example the Loonie is linked to oil. You believe oil prices will move up as the summer driving season approaches. It currently trades at 0.83 US$ . So you take a position in the Loonie. You are correct, oil prices move up and the Loonie is now worth 0.90. You have just made a 7 cent profit (0.7/.83 x 100 = 8.43%).
In concluding this article, we must reiterate that the foreign exchange market is very risky, very speculative and you should only participate in it with what you can afford to lose. With great risk comes great opportunity.