Lesson 1: What is Forex and Why Does it Exist?
Part of Module 1: The Absolute Beginner's Foundation
A Simple Analogy: The Airport Kiosk
Imagine you are at the airport in Dar es Salaam, about to fly to Europe for a holiday. You have Tanzanian Shillings (TZS), but you will need Euros (€) to spend there. You go to a currency exchange kiosk. The screen shows a rate: maybe 1 EUR = 2,800 TZS. You hand over 280,000 TZS and receive €100.
You have just participated in the Foreign Exchange market. You exchanged one currency for another.
A week later, you return from your trip with the same €100, which you never spent. You go back to the same kiosk. But now, the news has been good for Tanzania, and the Shilling has gotten stronger. The new rate is 1 EUR = 2,750 TZS. You exchange your €100 and receive 275,000 TZS. You've lost 5,000 TZS simply because the exchange rate changed.
This constant change in the value of currencies is the heart of the Forex market.
What is the Forex Market?
The Foreign Exchange (Forex or FX) market is a global marketplace where currencies are bought and sold. It is the largest and most active financial market in the world—trillions of dollars are exchanged every single day.
Unlike a stock market (like the New York Stock Exchange), there is no central building or location for the Forex market. It is "decentralized," which means all trading happens electronically through a network of computers between banks, institutions, and individuals all across the world.
Why Does This Market Exist?
There are two main reasons this giant market is necessary:
1. For Global Business & Trade
The primary purpose is to make international business possible.
Vivid Example: Imagine a coffee company in Tanzania that wants to sell its premium coffee beans to a café in Germany. The German café has Euros, but the Tanzanian company needs Shillings to pay its farmers and its local expenses. The forex market allows the German company to easily convert its Euros into Shillings to pay the Tanzanian company. Without this, global trade would grind to a halt.
2. For Speculation (Trading)
This is where we, as retail traders, come in. Because the exchange rates between currencies are always fluctuating due to news, economic health, and politics, there is an opportunity to profit from these changes.
Vivid Example: A trader in the EUR/USD market believes the Euro is going to get stronger against the US Dollar. The current price is 1.0700. The trader decides to "buy" the EUR/USD pair. A few hours later, the price rises to 1.0750. The trader closes the position, "selling" the pair at the new, higher price. The 50-pip difference represents their profit. We will learn all about pips and profits later, but the core idea is simple: we aim to profit from the constant change in a currency's value.