What Is Forex?
The term Forex, short for foreign exchange, refers to the
global
marketplace for buying and selling
national currencies against one another. It is one of the most actively traded and most liquid
financial markets in the world, with a daily trading volume exceeding $7 trillion as of
2024. Forex
trading is conducted electronically over-the-counter (OTC), meaning transactions occur directly
between participants, usually through computer networks or by phone, rather than on a
centralized
exchange.
Unlike stock markets which are limited to business hours, the Forex market operates 24
hours
a day,
five days a week, across different time zones. This means trading begins in Sydney,
continues in
Tokyo, London, and ends in New York — making it a truly global market.
In Forex, currencies are traded in pairs. Every trade involves simultaneously buying one
currency
and selling another. For example, when you trade EUR/USD, you are buying the
euro
while selling the
U.S. dollar. If you expect the euro to strengthen against the dollar, you would buy the pair. If
you
expect it to weaken, you would sell.
The appeal of Forex lies in its high liquidity, leverage potential, low entry barrier, and the
ability to trade both rising and falling markets. However, these same qualities also make it
risky
for those who are unprepared.
Understanding Forex Currency Pairs and Pricing
In Forex trading, currencies are quoted in pairs, such as
EUR/USD,
GBP/JPY, or USD/CHF. The first
currency in the pair is called the base currency, and the second is the
quote currency.
For instance, if the EUR/USD is quoted at 1.1000, it means
that
one euro (EUR) is equivalent to 1.10
U.S. dollars (USD). When you buy EUR/USD, you are buying euros and selling U.S. dollars. If the
value of the euro increases relative to the dollar, you can close your trade for a profit.
Conversely, if the euro weakens, you will incur a loss.
Forex prices move in decimal increments, typically shown to four or five
decimal
places. The
smallest movement in price is referred to as a pip, which stands for
“percentage in
point.” For most
currency pairs, 1 pip equals 0.0001. However, for pairs involving the Japanese
yen
(such as
USD/JPY), 1 pip equals 0.01.
For example, if EUR/USD moves from 1.1000 to 1.1005, that’s a movement of 5
pips.
Understanding how
pips work is essential because they are used to measure price movements, profits, and losses.
Most
trading platforms will calculate pip value automatically, but a basic understanding is vital to
control risk and size your positions properly.
How Forex Trading Works
When you enter the Forex market, you are speculating on the value of one currency compared to
another. If you believe the euro will increase in value relative to the U.S. dollar, you buy
EUR/USD. If you believe the opposite, you sell EUR/USD.
Trades are usually made through a Forex broker who provides a trading platform,
access to pricing,
and often leverage — the ability to control a large position with a small deposit. Leverage can
amplify both gains and losses. For example, with 1:100 leverage, you can control a $10,000
position
with just $100 of your own money.
A key element of Forex trading is the bid-ask spread. The bid
is
the price at which the market (or
your broker) is willing to buy a currency pair from you, and the ask is the
price
at which the
market is willing to sell it to you. The difference between these two prices is the
spread, and it
represents a broker’s profit.
Forex trading also involves lot sizes. The standard lot is 100,000 units of the
base currency. There
are also mini lots (10,000 units) and micro lots (1,000 units), which allow traders with smaller
accounts to participate.
Who Trades Forex and Why?
The Forex market is used by a wide range of participants. At the institutional level,
central
banks,
hedge funds, commercial banks, and corporations trade currencies
for
various economic and business
purposes. At the retail level, individual traders use online platforms to
speculate
on currency
movements and attempt to generate profits.
Some traders are speculators, looking to profit from short-term price
fluctuations.
Others are
hedgers, like international companies or investors, who use Forex to protect
against currency risk.
For example, a European business importing goods from the U.S. may use Forex to lock in exchange
rates and avoid losses from unfavorable currency moves.
Why People Trade Forex
Forex trading attracts many people due to several appealing characteristics:
- High Liquidity: Currencies can be bought and sold almost instantly without large price changes.
- Accessibility: Anyone with an internet connection and a small amount of capital can start trading.
- Leverage: Forex brokers offer leverage that enables traders to control large positions with small deposits.
- 24-Hour Market: The market is always open during the weekdays, making it flexible for people in different time zones.
- Low Costs: Most brokers charge no commission and profit from the spread.
However, while these benefits are real, Forex trading is not a guaranteed way to make
money. The
market can be extremely volatile, and many beginners lose capital due to poor preparation,
over-leveraging, or emotional decision-making.
To trade Forex successfully, a trader must develop a solid understanding of how the market
works,
commit to continuous learning, and apply strict discipline in their trading decisions.
Final Notes
Forex is not a get-rich-quick scheme. It's a professional discipline that requires time,
knowledge,
and emotional control. Understanding the basic terms such as currency pairs, pips, leverage,
spreads, and lot sizes is just the beginning. Long-term success comes from developing an edge,
practicing consistently, and managing risk with care.
This foundational knowledge will help you enter the market more confidently, and with further
study
and practice, you can begin crafting your own strategy to navigate one of the world’s most
dynamic
financial arenas.
Important!!! This is not financial advice, each of the courses is for educational purposes and is not a guarantee of profit. A large percentage of trades lose money, trade at your own risk after doing your own research, do not risk money that you cannot lose.