FOREX stands for the Foreign Exchange market where currency is traded or swapped. Trading currencies is big business – early 2014 saw the daily value of currency trades exceeding $5 trillion. A typical transaction would involve buying one country’s currency with another country’s currency. For instance, you might purchase US dollars using Australian dollars. If the USD strengthens in relation to the AUD, you will take a profit once you convert back into AUD. If the Australian dollar gains strength in relation to the US dollar, you will take a loss once swapping back.
FOREX trading comes in two general varieties – technical and fundamental. The technical trader will usually look for price and volume patterns to initiate a trade and he may only hold the position for seconds, minutes or sometimes hours. A fundamental FOREX trader may forecast broad economic changes in both countries for a longer term currency swap.
Because the FOREX market is so liquid and the price moves are relatively small – traders can swap currencies with extremely high leverage which can translate into large gains or losses. Currency trading is a zero sum game where one side will always profit and the other side will always have a loss.