It can be as simple as ordering something with your credit card from overseas through the internet or buying foreign cash for that holiday you're taking, up to the payment or receipt of payment for international trade or multi billion dollar cross border corporate mergers or takeovers. Wherever one currency has to be exchanged for another that is a part of the Foreign Exchange market and all those transactions create a total daily turnover of more than US $ 5 trillion per day in the global market, making it the largest financial market in the world.
Unlike Futures Exchanges or Stock exchanges it is a decentralised market where the market participants deal direct with each other all over the world rather than in a central marketplace.
For the Forex Trader it creates a marketplace of possibilities as due to the vast size of the market and the sheer volume of transactions. The value of the currencies change against each other almost constantly and provide numerous trading opportunities each day for traders to exploit.
|1||AUD/USD is now trading at 0.9300/0.9301|
|2||You decided to buy 1 lot (100,000) AUD at 0.9301|
|3||1 hour later AUD/USD is trading at 0.9350/0.9351|
|4||You decided to close your position at 0.9350|
|5||Your profits = (0.9350-0.9301)*100,000|
|6||Net profits = 490 USD (profits/loss are always calculated in term currency (currency on the right)|