If you’ve ever exchanged money while traveling abroad, you’ve already participated in the forex market. Short for foreign exchange, forex is the global marketplace where currencies are bought and sold. But unlike your airport currency counter, forex trading happens online and at a much larger scale—with over $7 trillion traded daily.
The basics of forex
Forex is all about trading currency pairs. When you trade forex, you’re buying one currency while simultaneously selling another. For example, in the pair EUR/USD, you’re buying euros and selling U.S. dollars.
Currencies are always traded in pairs because their value is relative to each other. If you think the euro will strengthen against the dollar, you’d go long (buy) EUR/USD. If you think the opposite, you’d go short (sell) the pair.
Types of currency pairs
In forex trading, you always trade one currency against another, which is why currencies are quoted in pairs. There are three main types of currency pairs:
Major pairs: These include the most heavily traded currencies in the world, such as EUR/USD (euro vs. U.S. dollar), USD/JPY (U.S. dollar vs. Japanese yen), and GBP/USD (British pound vs. U.S. dollar). Major pairs are known for their liquidity and tighter spreads.
Minor pairs: These are currency pairs that do not involve the U.S. dollar but still feature strong economies, such as EUR/GBP (euro vs. British pound) or AUD/JPY (Australian dollar vs. Japanese yen). They are less liquid than majors but still actively traded.
Exotic pairs: These pair a major currency with one from a smaller or emerging economy, like USD/TRY (U.S. dollar vs. Turkish lira) or EUR/SEK (euro vs. Swedish krona). Exotic pairs tend to have wider spreads and can be more volatile.
Understanding the types of currency pairs can help traders choose where to focus, depending on their experience level, risk tolerance, and trading goals.
Who trades forex?
Forex is traded by a wide range of participants:
- Banks and financial institutions
- Hedge funds and investment firms
- Corporations hedging currency risk
- Retail traders (like you) using online platforms
Retail forex trading has grown massively in recent years thanks to easy access through brokers, low entry costs, and 24/5 market hours.
How the forex market works
The forex (foreign exchange) market is where currencies are bought and sold. Unlike the stock market, forex does not have a centralized exchange. Instead, it operates through a global network of banks, brokers, and financial institutions.
Forex trading happens over-the-counter (OTC), meaning trades occur directly between parties, typically through electronic trading platforms or by phone. Because of this decentralized structure, the forex market is open 24 hours a day, five days a week, following the major financial centers across the world—from Sydney to Tokyo to London to New York.
Prices in the forex market move based on supply and demand, just like in stocks. Factors like economic news, interest rate decisions, political events, and even natural disasters can influence how a currency’s value changes relative to another.
How forex trading works
Here are some key features of forex trading:
- Leverage: Forex trading allows you to control large positions with a relatively small amount of money. While this increases potential profits, it also increases risk.
- Liquidity: With such high daily volume, forex is one of the most liquid markets, meaning trades are executed quickly and easily.
- Volatility: Prices can move sharply in response to news, interest rate decisions, and economic data. This creates both risk and opportunity.
- Market Hours: The forex market operates 24 hours a day, five days a week, starting from Sunday evening through Friday evening.
Why people trade forex
People are drawn to forex trading for two main reasons:
Opportunity: The forex market is open 24 hours a day, five days a week, offering frequent opportunities to trade across different time zones and economic events.
Liquidity: Forex is the largest and most liquid market in the world, meaning traders can often enter and exit positions quickly without major price disruptions.
Forex trading offers flexibility and the chance to profit from both rising and falling currencies. However, it also comes with its own risks, especially due to high leverage and global economic influences.
Many traders also expand their strategies by exploring other markets like stocks, cryptocurrencies, or commodities, each offering unique dynamics and opportunities. Learning how these markets interact can give you a broader perspective and better tools for building a diversified trading approach.
Ready to put your knowledge to work?
If you’re serious about trading and want to take your skills further, check out Go4Trades. We’re a prop trading platform that gives talented traders access to funded accounts, letting you trade real capital without taking on personal risk. You keep a share of the profits while we back you with the resources you need to succeed.
Final thoughts
Forex is the world’s largest and most accessible financial market. While it offers exciting opportunities, it’s important to understand the risks, stay informed, and have a solid trading plan. Whether you’re just curious or planning to dive in, knowing how forex works is the first step.
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