Background:
What is Forex? Forex (also called foreign exchange, FX or currency trading) is the largest financial market in the world. This market enables the exchange or “trade” of foreign currencies. For example, a company in the U.S. may need to pay a company in Europe, thereby creating a need to exchange U.S. Dollars into Euros.
Who uses Forex? Companies and individuals around the world may engage in forex trading for various reasons. Individual traders most commonly trade forex as a speculative investment. The “exchange rates” from one currency to another are always fluctuating. This creates an opportunity for individual traders to profit from these movements.
How does it work? As an example, if you expected that the Euro would gain value against the U.S. Dollar, you may buy Euros in exchange for U.S. Dollars. To do this you would place a buy order on the EUR/USD currency pair. Then, if the exchange rate moved as you expected, you could then close your transaction, which would exchange the Euros you purchased back into U.S. Dollars at the new higher exchange rate. In this case, you would earn a net profit. This type of transaction is called “going long”.
Another example: You can also profit if you expect a currency to lose value against another currency, this is called “going short”. In this example, you expect that the value of the Euro will fall against the Japanese Yen. So, you place a sell order on the EUR/JPY currency pair. If the value of the Euro drops as you expect, you could then close your transaction. This would buy back the Euros you sold using the Yen you were holding at the new exchange rate, effectively netting you a profit on the fall of the Euro.
If you want to learn more about how forex trading works, we suggest starting here... Wikipedia article: Foreign exchange market
http://en.wikipedia.org/wiki/Foreign_exchange_market