What Is Forex Trading?
Introduction
Forex, also known as FX (Foreign Exchange) or the currency market, is a global marketplace where currencies are bought and sold. It is a decentralized over-the-counter (OTC) market, meaning there is no central exchange like the stock market.
The forex market determines exchange rates for all currencies worldwide and is the largest financial market in the world, far bigger than stocks, bonds, or commodities.
Why Does the Forex Market Exist?
The forex market exists to support international trade and global investment.
Example:
A company in the United States importing goods from Europe must pay in Euros (EUR), even though its income is earned in US Dollars (USD). Forex trading enables this currency exchange.
Forex is also used for:
- Currency speculation
- Measuring currency strength
- Carry trade strategies based on interest rate differences
How Does Forex Trading Work?
Forex trading involves speculating on the price movement between two currencies, known as a currency pair.
Example:
EUR/USD represents the Euro against the US Dollar.
- If you expect the Euro to strengthen, you buy the pair
- If you expect the Euro to weaken, you sell the pair
Your profit or loss depends on how the exchange rate moves.
Key Features of the Forex Market
- Largest financial market with very high liquidity
- Operates globally across multiple time zones
- 24-hour trading, five days a week
- Strongly influenced by economic data, interest rates, and global events
- Lower transaction costs compared to many markets
- Use of leverage (which increases both risk and reward)
What Are Currency Pairs?
A currency pair shows the value of one currency compared to another.
- Base Currency: The first currency in the pair
- Quote Currency: The second currency
Example:
EUR/USD = 1.1000 → 1 Euro = 1.10 US Dollars
Types of Currency Pairs in Forex
1. Major Currency Pairs
Major pairs are the most traded currency pairs and account for nearly 85% of total forex volume.
- EUR/USD
- GBP/USD
- USD/JPY
- USD/CHF
Why beginners prefer major pairs:
- High liquidity
- Lower spreads
- Relatively stable price movement
2. Minor Currency Pairs
- EUR/GBP
- EUR/JPY
- GBP/JPY
3. Exotic Currency Pairs
- USD/INR
- USD/SGD
- EUR/TRY
Important Note
Exotic currency pairs usually have higher spreads and higher risk compared to major pairs.
Important Forex Trading Terms
Pips and Points
A pip is the standard unit used to measure price movement in forex. For most currency pairs:
1 pip = 0.0001
Bid Price and Ask Price
- Bid Price: Price at which the broker buys
- Ask Price: Price at which the broker sells
Spread
The spread is the difference between the bid and ask price. Lower spreads mean lower trading costs.
Leverage and Margin
Leverage allows traders to control large positions with a small amount of capital. Margin is the amount required to open and maintain a leveraged trade.
Risk Warning: Leverage can increase losses as well as profits.
Forex Market Sessions (Trading Hours)
| Market | Trading Time (UTC) |
|---|---|
| Sydney | 9:00 PM – 6:00 AM |
| Tokyo | 11:00 PM – 6:00 AM |
| London | 7:00 AM – 4:00 PM |
| New York | 12:00 PM – 9:00 PM |
Best volatility: London–New York overlap session.
Is Forex Trading Safe for Beginners?
Forex trading involves significant risk and is not suitable for everyone. Beginners should focus on education, risk management, and start with small capital.