To understand how Forex trading works, we need to take a look at how money itself works. Money is simply an agreement between two parties - typically a buyer and a seller - to exchange goods or services for a certain amount of money.
In the case of Forex trading, the two parties are typically a bank or other financial institution, and a trader. The trader buys a currency from the bank at one price and then sells it back to the bank at a higher price. The difference between these two prices is known as the spread, and that's how Forex traders make their money.
Of course, things are never quite that simple. For a trade to take place, there needs to be someone willing to buy the currency being sold by the trader. That's where the foreign exchange market comes in.
The foreign exchange market is simply a marketplace where buyers and sellers of currencies can come together and trade. It's important to remember that, unlike stocks or other financial assets, currencies are not traded on a centralized exchange. Instead, they're traded in the foreign exchange market, which is a global network of banks, financial institutions, and individual traders.
This decentralized structure has several advantages. First, it makes the foreign exchange market much more accessible than other markets. Second, it allows for 24-hour trading since there is always someone willing to buy or sell currency. Finally, it provides a high degree of liquidity, which means that trades can be made quickly and easily without having to worry about finding a buyer or seller.