What is Forex Trading Learn Foreign Exchange Meaning & Functions

The foreign exchange market is fast-paced and influenced by a myriad of factors, which is why it’s essential to approach it through a well-thought-out plan. It is concerned with short-term positions that are held and liquidated within the same day. Scalp trades are illustrated by holding positions for minutes/seconds, with profit amounts limited by the no. of Pips.

In the case of forex, the market price tells a trader how much of one currency is required to purchase another. For example, the current market price of the GBP/USD currency pair shows how many US dollars it would take to buy one pound. Forex trading, also known as foreign exchange or FX trading, is the conversion of one currency into another.

Pros and cons of trading forex

Forex is the largest and most liquid financial market in the world, with trillions of dollars traded daily. As an OTC (over-the-counter) market with no centralized exchange, it is also one of the least understood. In this article we’ll guide you through the key points you should know before you participate. Although the forex market is closed to speculative trading over the weekend, the market is still open to central banks and related organisations. So, it is possible that the opening price on a Sunday evening will be different from the closing price on the previous Friday night – resulting in a gap.

This ‘currency pair’ is made up of a base currency and a quote currency, whereby you sell one to purchase another. The price for a pair is how much of the quote currency it costs to buy one unit of the base currency. You can make a profit by correctly forecasting the price move of a currency pair. Forex traders who use technical analysis study price action and trends on the price charts. These movements can help the trader to identify clues about levels of supply and demand.

There are seven major currency pairs traded in the forex market, all of which include the US Dollar in the pair. Forex/CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading Online Forex/CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The euro and the U.S. dollar pair, listed as EUR/USD, is the most heavily traded currency pair in the world. As of May 2025, its share of daily forex trades stood at nearly 30%.

Martingale Strategy

A U.S. trader with a USD account can bet both on the dollar or against it. Much like short selling stocks, foreign currency can be borrowed, and the money used to buy U.S. dollars. If the foreign currency declines, the U.S. trader can pay back the loan with fewer U.S. dollars and make a profit. Most brokers offer demo accounts that simulate real market conditions but use virtual money.

This was driven by widespread access to personal computers and the internet, along with brokers offering leveraged currency trading via their software platforms. Prior to this, the forex market had largely been the domain of major banks and financial institutions. A pip (percentage in point) is the smallest price movement in forex, typically the fourth decimal place for most currency pairs (0.0001).

For example, when engaging in spot forex trading, you’re trading contracts that have no expiry date, unlike futures or options. This means your positions can remain open indefinitely as long as you maintain the required margin, and accounting for possible overnight costs. You can make money from forex trading by correctly predicting a currency pair’s price movements and opening a position that stands to profit. For example, if you think that a pair will decline in value, you could go short and profit from a market falling. Meanwhile, trading involves a shorter-term approach, seeking to profit from the frequent buying and selling of assets. Traders seek to capitalize on short-term price trends and may hold positions for a few seconds (scalping), minutes, hours (day trading), or days to weeks (swing trading).

The forex market is made up of currencies from all over the world, which can make exchange DowMarkets Broker rate predictions difficult as there are many forces that can contribute to price movements. That said, the following factors can all have an effect on the forex market. Forex trading works like any other transaction where you are buying one asset using a currency.

The market opens on a Monday morning in Sydney and closes on Friday evening in New York, allowing for continuous trading across different global financial centres. This around-the-clock availability accommodates various time zones and trading schedules. In forex trading, currencies are listed in pairs, such as USD/CAD, EUR/USD, tokenexus or USD/JPY.

Exchange Rate Definition

• A stop order, on the other hand, is used to limit potential losses by automatically closing a trade if the price reaches a certain level.
• For example, if you buy euros at $1.20 and sell when the price reaches $1.22, you’d make 2 cents per euro traded.
• The London session overlaps the end of the Tokyo session and the start of the New York session.
• Unless there is a parallel increase in supply for the currency, the disparity between supply and demand will cause its price to increase.

Countries like the U.S. have sophisticated infrastructure and robust regulation of forex markets by organizations such as the National Futures Association and the CFTC. Developing countries like India and China have restrictions on the firms and capital to be used in forex trading. Europe as a whole is the largest forex market in the world, but regulations still vary among different member states. In the U.K., the Financial Conduct Authority monitors and regulates forex trades. Line charts are used ADSS forex broker to identify big-picture trends for a currency.

How to choose a reliable broker

• These financial products allow you trade the difference in the price of a currency pair, without actually owning the currency itself.
• The market opens on a Monday morning in Sydney and closes on Friday evening in New York, allowing for continuous trading across different global financial centres.
• Forex trading, also known as foreign exchange trading or currency trading, is the buying and selling of currencies on the foreign exchange market.

When the euro fell, and the trader covered the short, it cost the trader only $110,000 to repurchase the currency. The difference between the money received on the short sale and the buy to cover it is the profit. Most forward trades have a maturity of less than a year in the future but a longer term is possible. As in the spot market, the price is set on the transaction date but money is exchanged on the maturity date. A forward contract is tailor-made to the requirements of the counterparties. They can be for any amount and settle on any date that is not a weekend or holiday in one of the countries.

Discover the risks and rewards of trading forex

Copy trading in forex allows traders, particularly beginners or those with less time or expertise, to automatically mirror the trades of more experienced traders. Anybody with a computer and an internet connection can start trading forex almost immediately. This is an exchange-traded agreement to buy or sell a set quantity of a currency at a predetermined price on a specific future date. Forex trading involves the exchange of one currency for another for an agreed exchange rate. The tax on forex positions does depend on which financial product you are using to trade the markets. Traders make a prediction on forex pairs to profit from one currency strengthening or weakening against another.

The first currency in the pair is called the base currency and the second is called the counter or quote currency. Day trading is a trading strategy which involves opening and closing forex positions on the same trading day, with all positions closed by the end of the day. Leverage involves using your broker’s money to enable you to control a larger position with a smaller amount of initial trading capital. It is like a temporary loan from your broker which amplifies both potential profits and losses.

Since the forex market is decentralised, there is not one single exchange where all trades are placed. It may become problematic when finding the correct market price of a currency pair. In India, on authorised platforms, forex trading is restricted to currency pairs like USD/INR, GBP/INR, JPY/INR, and EUR/INR. A trader thinks that the European Central Bank (ECB) will be easing its monetary policy in the coming months as the Eurozone’s economy slows. As a result, the trader bets that the euro will fall against the U.S. dollar and sells short €100,000 at an exchange rate of 1.15. Over the next several weeks the ECB signals that it may indeed ease its monetary policy.