I remember, with all sincerity of mind, my first day of enquiry on - what is forex trading - from an online forum, as a novice. I got series of replies from the professionals then. They keep referring me to series of website where I could read. However, the more I read, the more I get confused about all what is being written about forex trading. Being an elite, I thought I could download and read series of materials about the market which I did. That did not solve the problem until I attended my first training seminar on forex trading. After the seminar, I discover that forex trading is more of practical than theory. Infact, there are lot of things you will know theoretically but until you see the practicality on the platform or in your trade, result, you will not understand what it really means e.g. leverage.

As the lecturer was delivering his lecture that day, most of the terminologies were not new to me. So, I have learnt a lot about them and that made the whole exercise more simpler.

WHAT IS FOREX TRADING

 The word FOREX is a derivation from two words, i.e  FOReign EXchange.  In other words, its about of an exchange between two countries. What are we exchanging. We can exchange anything with any body, as a salary worker, you are exchanging your knowledge for your salary, when you buy an article, you have exchange your cash for the article. In this context, what we are exchanging is currency.

TRADING - Trading is the act of buying and selling of goods and services.

FOREX TRADING - Here what we want to do is to exchange currencies of two countries. At the end of our exchange, because we are trading, we should be making profit or loss because we are not just exchanging for the fun of exchange.

Simply put, FOREX EXCHANGE TRADING is the simultaneous buying of one currency and selling of the other for profit (or loss) motive.

HOW DOES IT WORKS?

We would like to look at the context of forex trading by considering how a business man buys, sells his good and make profit and probably, losses sometimes.

A businessman selling e.g Laptop computers would like to find source where he can buy the computer at a cheap price, then add  his own profit mark up. Eg. He could buy the computer at say N60,000,  while he may decide to sell it to the end user at say N70,000. Making a clear profit of N10,000.  This is a simple concept of how a business man earn his profit.  Let us look at the concept of exchange in this case.

The Businessman here exchange the sum of N60,000 for a cheap laptop computer. Giving out N60,000 to collect a laptop computer. Having collected the computer, he then exchange the same laptop computer to another person collecting the sum of N70,000. The resultant profit from this simple exchange is N10,000. (Profit)

If he had exchange his N60,000 for Laptop, and instead of selling it for N70,000, he sold (exchange) it to the end user at the rate of N50,000, he would be making a clear loss of N10,000 (Loss).

This simple principle is all what you are practising in a FOREX TRADING MARKET. 

Now, we have handle the issue of how a businessman makes his profit. The same principle applies when you exchange (buy and sell currencies). We shall consider how an offline currency works before we examine how an online currency trading works. When we talk of offline currency trading, we mean the physical exchange of your US Dollars for Nigerian Naira at the  Bank or any of the Ubiquitious bureau de change dealers.

Our case study here will focus on an exchange of US dollars (USD)  to Nigerian Naira (NGN).  Whenever you approach a Bureau De exchange, they will need to give you the price or the value of the exchange depending on if:

1. You have USD (United States Dollars) with you and you want to exchange it to NGN (Nigerian Naira) or

2. You have NGN (Nigerian Naira) with you and you want to exchange it to USD (United States Dollar)

The reason for this is that, they simply buy the USD from you at a Cheap price and they sell it to another person at a high price. The same goes for the example of our businessman that buys computer at N60,000 and sell it for N70,000. That is why the bureau de change will have to ask you, 'Do you want to buy dollar (do you have Naira that you want to exchange to dollars) or 'Do you want to Sell dollar (Do you have dollars with you that you want to exchange to Naira.

The Price:

Now if you have dollars and you want to change it to naira, the price is say N150

If you have naira and you want to exchange it to dollar, the price is N154.

The profit margin of the bureau they change is N4 on each dollar. (assuming the exchange rate is constant)

This is what is being referred to as currency quote. If we would have to give this price quote, we will say

                                   USD / NGN = 150 / 154

There are 4 parts of this currency Quote,

1. The first currency on this our example is the USD. It could either be any currency depending on the exchange currencies as you know here that our case study here is USD and NGN. The first currency listed on the currency quote is called BASE CURRENCY.

2. The second currency on the exchange here is NGN. otherwise known as the COUNTER CURRENCY

3. The first price here is quoted in Naira, i.e.  N150. (Otherwise referred to as SELLING PRICE)

4. The second price here is N154 (Otherwise referred to as the buying price)

Now, what is the meaning of all these.

                                     USD / NGN  =  150 / 154

Whenever you see the first currency listed on the exchange, it means the base currency and you assume it is in 1 (One) unit.  That means that here we have 1 (One) USD.

The counter currency here means the quantity of the counter currency (NGN) that will exchange for One (1) unit of the base currency.

Simply put, we want to know how much we would buy or sell one Unit of USD with our Nigerian naira.

The answer now is:

To sell 1 (One) Unit of US Dollar, you will receive N150. In other words, if you have USD, and you want to exchange it to Naira, you will be paid N150.

To buy 1(One) unit of US Dollar, you will be paying N154. In other words, if you have Naira, and you want to exchange it to USD, you will have to part with N154 naira to acquire 1 unit of USD. How does the broker (Bureau dey change make their money? They buy 1 USD from you at N150, they sell it to another person at N154 making a clear profit of N4 on each dollar they buy and sell.

This simple explanation explain how an offline exchange is being done. We would translate this simple knowledge of an exchange to what goes on  online forex exchange at our seminar...