Forex: A comprehensive guide to the foreign exchange market and how to invest in it

Introduction: What is the Forex Trading Market?

Forex trading is considered one of the largest global financial markets in terms of trading volume and liquidity. Banks, companies, investors, and individuals gather to exchange currencies almost around the clock. Every time you convert your local currency before traveling, you are directly participating in this massive market.

According to the latest statistics released in April 2025, the average daily trading volume in the forex market was about $9.6 trillion per day, making it larger than all the global stock markets combined in terms of transaction volume. This huge size is due to the global nature of currencies and the reliance of the international economy on continuous exchange operations.

Although this market offers significant opportunities for investment and speculation, it carries high risks due to the use of leverage and rapid price fluctuations. Therefore, understanding how the market works and its mechanisms is essential before starting forex trading.

Definition of Forex and How It Works

The word “Forex” is an abbreviation for the term (Foreign Exchange), which is the market where currencies are continuously traded among various parties worldwide. When trading forex, the investor always deals with a currency pair such as EUR/USD or USD/JPY.

In each currency pair, the first currency is called the “Base Currency”, and the second is the “Quote Currency”. The quoted price shows how many units of the quote currency are needed to buy one unit of the base currency.

How the Market Works

The forex market operates through a global electronic network without a single centralized exchange, known as over-the-counter (OTC) trading. It operates 24 hours a day, five days a week, starting from the Sydney session in the morning to the New York session in the evening.

Traders rely on their expectations of each currency’s movement within the pair:

• Buy: when expecting the base currency to rise
• Sell: when expecting the base currency to fall

Since currency movements depend on the relationship between two currencies, an increase in one currency necessarily means a decrease in the other, making 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 that differ in liquidity and risk:

1. Major Pairs (Majors)

Include the most traded currencies worldwide, representing strong economies, and are therefore the most liquid with the narrowest spreads:

• EUR/USD – Euro versus US Dollar
• USD/JPY – US Dollar versus Japanese Yen
• GBP/USD – British Pound versus US Dollar
• AUD/USD – Australian Dollar versus US Dollar
• USD/CHF – US Dollar versus Swiss Franc
• USD/CAD – US Dollar versus Canadian Dollar

2. Minor Pairs (Minors)

Also called cross pairs because they do not include the US Dollar. Although less active than major pairs, their spreads are wider:

• EUR/GBP – Euro versus British Pound
• EUR/CHF – Euro versus Swiss Franc
• GBP/JPY – British Pound versus Japanese Yen

3. Exotic Pairs (Exotics)

Combine a strong currency with a currency from an emerging economy, characterized by high volatility and wide spreads, making them suitable for experienced traders:

• USD/MXN – US Dollar versus Mexican Peso
• USD/THB – US Dollar versus Thai Baht

Basic Terms in Forex Trading

Spread (Spread)

The difference between the bid and ask price for a currency. The smaller the spread, the better for the trader. Example: if the bid price is 1.1050 and the ask price is 1.1048, the spread equals 2 pips.

Lot (Lot)

A measurement unit that determines the size of the trade. It is divided into different types (Standard, Mini, Micro) to facilitate trading volume management and risk control.

Pip (Pip)

A measurement unit for price change in a currency pair, usually representing movement in the fourth decimal place. If EUR/USD moves from 1.1000 to 1.1001, it has moved by 1 pip.

Leverage (Leverage)

A tool that allows increasing the size of the trade using a small part of the capital (Margin). It increases potential profits but also doubles losses. Example: with 1:100 leverage, you can trade $10,000 with only $100 investment.

Margin (Margin)

A small amount of the trade’s value used as collateral to open leveraged positions. To open a $1,000 position, you may only need a margin of $50 depending on the leverage used.

Forex Market Trading Hours

The forex market is characterized by operating almost nonstop 24 hours a day, five days a week. Trading begins with the opening of the Sydney session in the morning and continues until the closing of the New York session in the evening.

The main trading sessions follow consecutively:

• Sydney session
• Tokyo session
• London session
• New York session

The best trading times are during overlaps of the main sessions, especially the overlap between London and New York, where trading volume and liquidity increase significantly. Conversely, activity tends to decrease during the Asian session.

Factors Affecting the Forex Market

Central Bank Monetary Policies

Decisions by central banks regarding interest rates directly impact currency value. Raising interest rates makes the currency more attractive to foreign investors. When the US Federal Reserve raised interest rates in 2022, the dollar strengthened significantly against most major currencies.

Inflation and Economic Growth

High inflation reduces the purchasing power of a currency, while strong economic growth attracts investments and strengthens the currency.

Government Intervention

Central banks sometimes intervene directly in the forex market to support their currency. This happened during the Plaza Accord in 1985, where five countries cooperated to lower the dollar’s value.

Political and Geopolitical Crises

Unstable political events cause investors to turn to “safe-haven” currencies like the dollar and Japanese yen. During the COVID-19 pandemic in 2020, emerging market currencies declined while safe-haven currencies appreciated.

Forex Trading Strategies

Long-term Trading

Relies on holding positions for weeks, months, or years, benefiting from overall trends and fundamental economic factors. Mainly focuses on fundamental analysis:

Advantages:

• Flexibility in monitoring
• Focus on major trends
• Ample time for analysis
• Less psychological pressure

Short-term Trading

Focuses on daily or intraday price movements, from minutes to a few days. Requires continuous monitoring and intensive use of technical analysis.

Main Types:

• Scalping: Opening and closing trades within minutes or seconds
• Day Trading: Trades opened and closed within the same day
• Swing Trading: Holding positions for days or weeks

Advantages:

• Faster profit opportunities
• Exploiting quick fluctuations
• Flexible strategies
• Reduced overnight risk

Important Technical Indicators

• Moving Averages: Help identify the overall trend
• Relative Strength Index (RSI): Shows if the price is overbought or oversold
• MACD Indicator: Indicates trend and potential reversals
• Bollinger Bands: Reveal market volatility
• Support and Resistance Levels: Specific prices where the market tends to pause or reverse

Advantages of Forex Trading

✅ 24/5 Trading

✅ Low capital requirements thanks to leverage

✅ High liquidity and ease of executing large trades

✅ Relatively narrow spreads

✅ Various profit opportunities from short-term and long-term movements

Challenges of Forex Trading

❌ High risks and the possibility of losing all capital

❌ Difficulty in learning and proper application

❌ Continuous price volatility and sudden changes

❌ Difficulty managing trades around the clock

❌ Prices are quickly and unexpectedly affected by economic news

Basic Tips for Successful Forex Trading

📌 Learn the market well: Study currency pairs and influencing factors before risking your capital

📌 Set a clear plan: Define your goals, risk level, and strategy

📌 Use a demo account: Test your strategies on a virtual account before trading with real capital

📌 Manage risks: Use stop-loss orders and set risk percentage per trade (1-2% of capital)

📌 Control your emotions: Don’t let losses or greed control your decisions

📌 Follow economic news: Stay informed about economic and political events affecting currencies

📌 Evaluate your performance: After each trade, analyze what worked and what needs improvement

Summary

The forex trading market is the largest and most liquid global financial market. It offers diverse opportunities for investment and speculation thanks to its 24-hour operation and continuous price fluctuations.

Success in forex depends on continuous learning, developing analytical skills, and adhering to a clear plan. Whether your goal is short-term profits or building a long-term investment strategy, understanding the market, proper planning, and using the right tools are all essential elements for achieving positive results.

Remember, forex trading is not just a currency exchange market but an ongoing educational experience to understand the global economy and benefit from financial opportunities wisely and with discipline.