Forex: A Comprehensive Guide to Understanding the Foreign Exchange Market and Trading Mechanisms

What is the Forex Market?

Every time you exchange your currency before traveling or pay with a foreign currency, you are directly participating in the foreign exchange market. This massive market operates nonstop around the clock, with banks, companies, governments, and individuals engaging in currency exchange worldwide.

Forex trading simply involves buying a currency and benefiting from its change in value against another currency. When you trade, you always deal with currency pairs like EUR/USD or USD/JPY, where the first currency is the base and the second is the quote. The quoted price tells you how much of the second currency you need to buy one unit of the first.

This market is classified as the largest financial market globally in terms of trading volume. The average daily trading volume reached 9.6 trillion dollars according to the latest statistics in April 2025, far exceeding the combined trading volumes of global stock markets.

Basic Characteristics of the Forex Market

The market is distinguished by several features that make it unique among financial markets:

🔹 No Central Exchange: Unlike stock markets, trading occurs over a global electronic network connecting major banks and financial institutions, known as over-the-counter (OTC).

🔹 Nearly Continuous Operation: The market opens five days a week, 24 hours a day, from Sydney session to New York, allowing traders the freedom to choose convenient times.

🔹 Massive Liquidity: Large transactions can be executed without significantly affecting prices, and spreads are relatively narrow compared to other markets.

🔹 Constant Movement: Currencies continuously change in value based on various economic and political factors, providing daily opportunities for traders.

How Does Forex Trading Work?

Trading relies on comparing currencies. A currency cannot be evaluated without comparing it to another, so prices always appear as pairs.

When you decide to trade:

• Buying means expecting the base currency to rise in value
• Selling means expecting its value to fall

Since currency movements are inversely related, an increase in one currency necessarily means a decrease in the other in the pair. This makes the market based on continuous comparison of the strength and weakness of currencies.

Types of Currency Pairs

Forex pairs are divided into three main categories:

1️⃣ Major Pairs (Majors)

Include the most traded currencies worldwide and represent strong economies. They offer the highest liquidity and the narrowest spreads.

Popular pairs:

• EUR/USD (Euro vs. US Dollar)
• USD/JPY (Dollar vs. Yen)
• GBP/USD (Pound Sterling vs. US Dollar)
• USD/CHF (Dollar vs. Swiss Franc)
• AUD/USD and USD/CAD

2️⃣ Minor Pairs (Minors)

Also called cross pairs because they do not include the US dollar. Less active than majors, but their spreads are higher.

Examples: EUR/GBP, EUR/CHF, GBP/JPY

3️⃣ Exotic Pairs (Exotics)

Combine a strong currency with one from emerging markets. Characterized by higher volatility and wider spreads, suitable for experienced traders.

Examples: USD/MXN, USD/THB

Basic Terms in Forex Trading

📌 Spread: The difference between the bid and ask price. The smaller, the better for the trader. Example: if the bid is 1.1050 and the ask is 1.1048, the spread equals two pips.

📌 Lot: A measurement unit that determines the size of the trade. Divided into standard, mini, and micro lots, helping manage risk. A trade of 0.01 lot means a small size suitable for beginners.

📌 Pip: The smallest unit of price movement, usually the fourth decimal place. If EUR/USD moves from 1.1000 to 1.1001, it moved by one pip.

📌 Leverage: A tool that allows increasing the size of a trade using a small part of your capital. Example: with 1:100 leverage and a $100 deposit, you can trade $10,000. But it amplifies both profits and losses.

📌 Margin: The small amount you deposit as collateral to open leveraged trades. To open a $1,000 trade, you might only need $50 margin depending on leverage.

Forex Trading Hours and Global Sessions

Trading officially begins with the Sydney session opening on Monday morning and continues until the New York session closes on Friday evening. Trading occurs over a global network, not from a single exchange, so settlement dates are automatically renewed at 5 PM New York time (Rollover process).

Best trading times are during overlaps of major sessions, especially when London overlaps with New York, where activity intensifies, liquidity increases, and prices move faster.

Conversely, activity tends to decrease during the Asian session, especially in the middle.

Main Factors Influencing the Forex Market

1️⃣ Central Bank Monetary Policies: Decisions on interest rates directly impact currency value. Raising rates makes a currency more attractive to foreign investors. Example: in 2022, the US Federal Reserve raised interest rates consecutively to combat inflation, causing the dollar to rise against the euro and yen.

2️⃣ Inflation and Economic Growth: High inflation reduces a currency’s purchasing power, while strong growth attracts investments and strengthens the currency. In 2015, China announced a slowdown in growth and lowered the yuan’s value, affecting global markets.

3️⃣ Direct Government Intervention: Central banks sometimes intervene directly to support or devalue their currency. The Plaza Accord of 1985 saw the US, Japan, Germany, France, and the UK cooperate to lower the dollar’s value.

4️⃣ Political Events and Geopolitical Crises: Unstable events and international tensions push investors toward “safe-haven” currencies like the dollar and yen. In March 2020, during the COVID-19 pandemic, investors flocked to the dollar and yen as safe assets.

Types of Forex Trading Strategies

Long-term Trading

Based on holding positions for weeks, months, or years to benefit from overall trends and fundamental factors.

Focuses on fundamental analysis: growth rates, interest rates, central bank policies.

Advantages:

• Flexibility in monitoring (No need to sit constantly in front of the screen)
• Focus on major trends
• Less psychological pressure
• Ample opportunity for analysis and planning

Tools:

• Futures contracts on major pairs

Short-term Trading

Focuses on daily or intraday price movements to achieve quick profits. Trades last from minutes to a few days.

Strategies like day trading and scalping.

Advantages:

• Faster profit opportunities
• Flexible strategies
• Market is open nearly 24 hours
• Closing positions daily reduces overnight risk

Tools:

• CFDs (Contracts for Difference)
• Spot trading

Well-Known Strategies for Effective Trading

🔹 Scalping (Scalping): Opening and closing trades within minutes or seconds, earning small profits from each.

🔹 Day Trading (Day Trading): Opening and closing all trades within the same day, avoiding overnight risks.

🔹 Swing Trading (Swing Trading): Holding trades for several days or weeks to capitalize on medium-term trends.

🔹 Trend Following (Trend Following): Following the overall price trend, buying in uptrends and selling in downtrends.

Basic Technical Indicators

📊 Moving Averages: Help identify the overall trend and reduce the impact of daily fluctuations.

📊 Relative Strength Index (RSI): Shows if the price is overbought or oversold.

📊 MACD Indicator: Indicates trend direction and suggests potential reversals.

📊 Bollinger Bands: Reveal market volatility levels and potential sudden movements.

📊 Support and Resistance Levels: Specific prices where the market tends to pause or reverse.

Advantages of Forex Trading

✅ 24-Hour Trading: Flexibility to choose any time that suits your schedule.

✅ Low Capital Requirements: Start with relatively small capital thanks to leverage.

✅ High Liquidity: Execute large trades without significantly affecting prices.

✅ Narrow Spreads: Lower costs compared to other markets.

✅ Various Profit Opportunities: Benefit from short-term or long-term movements.

Risks of Forex Trading

❌ High Risks: Possibility of losing all capital due to sudden price swings.

❌ Difficult to Learn: Requires advanced knowledge of technical and fundamental analysis.

❌ Continuous Volatility: Increases the chance of significant losses.

❌ 24-Hour Management: The market is always open, exposing trades to changes during absence.

❌ Leverage is a Double-Edged Sword: Amplifies both profits and losses.

Steps to Start Forex Trading

1️⃣ Choose a Reliable Trading Platform: Look for a regulated, secure platform with low spreads and strong analytical tools.

2️⃣ Open a Demo Account First: Test strategies with virtual funds without risking real capital.

3️⃣ Set Goals and Make a Plan: Decide on capital amount, trade sizes, currency pairs, and profit targets.

4️⃣ Select Currency Pairs: Start with high-liquidity major pairs (EUR/USD, USD/JPY).

5️⃣ Use Risk Management Orders: Set stop-loss and take-profit for each trade.

6️⃣ Start with Small Capital: Begin with small trade sizes until you gain experience.

7️⃣ Monitor and Analyze: Track your trades’ performance and learn from them.

8️⃣ Keep Learning: The market is dynamic. Follow economic news, analyses, and educational resources.

Golden Tips for Beginners

💡 Learn the Basics First: Study currency pairs and influencing factors before investing.

💡 Follow Your Plan: Set rules and stick to them in every trade without deviation.

💡 Start with a Demo Account: Practice in the market with virtual funds first.

💡 Manage Risks Wisely: Know your financial limits and use stop-loss orders.

💡 Control Your Emotions: Don’t let fear or greed dictate your decisions.

💡 Diversify Trades: Don’t bet everything on a single trade.

💡 Begin with Major Pairs: Before venturing into exotics.

Summary

The forex market is the largest and most important financial market in the world, offering real opportunities for traders, companies, and banks to exchange currencies and profit from exchange rate changes.

What makes Forex trading unique is its massive liquidity, 24-hour availability, and investment flexibility. Beginners can start with small capital, while professionals can employ complex strategies.

Success depends on continuous learning, developing analytical skills, managing risks wisely, and controlling emotions during trading.

Whether aiming for short-term profits or long-term investment, understanding the market, proper planning, and using the right tools are key elements to make your experience safer and more profitable.

Forex is not just a currency exchange market but an ongoing educational experience to understand the global economy and capitalize on financial opportunities intelligently and disciplined.