The foreign exchange market (forex, FX, or currency market) is a worldwide, decentralised, over-the-counter market for the trading of currencies. According to a statement issued by CLS, a major settler of trades, the daily traded volume in February 2018 hit $1.855 trillion*.
Foreign exchange, or Forex for short trading involves buying one currency pair "base currency" against another currency pair "counter currency" anticipating that one currency will rise or fall against another.
How does trading Forex work?
Forex trading is similar to shares trading, except you're buying and selling one currency against another. It typically involves leverage which allows you to trade a much bigger volume by using only a limited amount of capital. There are many different forex strategies used for trading Forex. See below an example of how you could trade Forex using 1:100 leverage.
Forex Trading example
Opening the position
The price of the AUD against the USD (AUD/USD) is 0.71706 bid /0.71707 ask. You would like to buy 1 standard lot (AUD100,000) at 0.71707 ask.
You have 5,000 AUD balance and the leverage is 1:100
100,000 AUD x 0.71707 = 71,707 USD Opening value
100,000 AUD x 1% = 1,000 AUD required margin
Closing the position
Three days later, the price of AUD against the USD rises up to 0.72752 bid/0.72754 ask. Since you are in profit, you would like to close your position by selling 1 standard lot (AUD100,000) at 0.72752 bid.
100,000 AUD x 0.72752 = 72,752 USD Closing value