Understanding Forex Trading
What is Forex?
The Foreign Exchange Market (Forex or FX) is where currencies are traded. It’s the largest financial market in the world, with an average daily trading volume exceeding $7.5 trillion. Unlike stocks, which trade on exchanges, Forex trades over-the-counter (OTC) and operates 24 hours a day, five days a week.
Currency Pairs
Major Pairs
- EUR/USD (Euro/US Dollar) – “The Euro”
- GBP/USD (British Pound/US Dollar) – “Cable”
- USD/JPY (US Dollar/Japanese Yen) – “The Yen”
- USD/CHF (US Dollar/Swiss Franc) – “The Swissy”
- USD/CAD (US Dollar/Canadian Dollar) – “The Loonie”
- AUD/USD (Australian Dollar/US Dollar) – “The Aussie”
- NZD/USD (New Zealand Dollar/US Dollar) – “The Kiwi”
Understanding Pairs
- Base Currency: First currency in the pair (what you’re buying)
- Quote Currency: Second currency in the pair (what you’re paying with)
- Pip: Smallest price move (usually 0.0001 for most pairs)
- Bid/Ask Spread: Difference between buying and selling price
How Forex Trading Works
Basic Concepts
- Long Position: Buying the base currency
- Short Position: Selling the base currency
- Lot Size: Standard (100,000 units), Mini (10,000), Micro (1,000)
- Leverage: Borrowing to control larger positions
- Margin: Required deposit to maintain positions
Price Movements
Exchange rates fluctuate based on:
- Economic indicators
- Interest rates
- Political events
- Market sentiment
- Trade balances
Trading Sessions
Major Market Hours
- Asian Session: Tokyo (7PM-4AM EST)
- European Session: London (3AM-12PM EST)
- American Session: New York (8AM-5PM EST)
- Session Overlaps: Periods of highest liquidity and volatility
Trading Strategies
Technical Analysis
- Chart patterns
- Support and resistance levels
- Trend lines
- Technical indicators (RSI, MACD, Moving Averages)
- Price action trading
Fundamental Analysis
- Economic calendar events
- Interest rate decisions
- GDP reports
- Employment data
- Inflation rates
- Political developments
Popular Trading Styles
- Scalping: Very short-term trades (minutes)
- Day Trading: Positions closed same day
- Swing Trading: Positions held days to weeks
- Position Trading: Long-term trades (weeks to months)
Risk Management
Essential Principles
- Never risk more than 1-2% per trade
- Always use stop-loss orders
- Understand leverage risks
- Maintain proper position sizing
- Keep track of exposure across correlated pairs
Risk Control Measures
- Stop-Loss Orders: Automatic exit at specific price
- Take-Profit Orders: Lock in gains
- Position Sizing: Based on account risk tolerance
- Correlation Analysis: Avoid overexposure to similar pairs
Getting Started in Forex
Prerequisites
Education
- Understanding currency markets
- Technical and fundamental analysis
- Risk management principles
- Trading psychology
Trading Setup
- Reliable internet connection
- Quality forex broker
- Trading platform familiarity
- Economic calendar access
Steps to Begin
- Study forex market basics
- Practice on demo account
- Start with major pairs
- Use small position sizes
- Keep detailed trading journal
Common Terms
- Pip Value: Monetary value of smallest price move
- Rollover: Interest earned/paid for overnight positions
- Slippage: Difference between expected and actual price
- Margin Call: Warning when account equity too low
- Swap: Interest rate differential between currencies
Market Participants
- Banks: Largest forex traders
- Central Banks: Policy makers and interventionists
- Corporations: International business operations
- Investment Funds: Portfolio management
- Retail Traders: Individual investors
Additional Resources
- International Monetary Fund (IMF)
- Bank for International Settlements (BIS)
- Major central bank websites
- Forex Factory (economic calendar)
- Babypips.com (educational resource)