If you’re asking “forex trading — how does it work?”, you’re not alone. The forex (foreign exchange) market is the largest and most liquid financial market in the world, with over $7 trillion traded daily. Understanding how it works is essential for anyone looking to capitalise on currency movements. This article breaks down what forex trading is, how it functions behind the scenes, and what you need to get started.

Key Takeaways

• Forex trading involves buying one currency while simultaneously selling another.
• Currencies are traded in pairs such as EUR/USD or GBP/JPY.
• Traders aim to profit from changes in exchange rates.
• Market participants include central banks, institutions, and retail traders.
• Leverage, analysis, and risk management are critical components of trading success.

What Is Forex Trading?

Forex trading is the act of exchanging one currency for another in order to make a profit from fluctuating exchange rates. For example, if you expect the euro to rise against the US dollar, you buy EUR/USD. If the euro strengthens, you sell it later at a higher price and make a profit.

Forex is traded in pairs because you’re always buying one currency and selling another at the same time.

How Does Forex Trading Work?

1. Currency Pairs

Forex is traded in pairs such as:

• Major pairs: EUR/USD, GBP/USD, USD/JPY
• Cross pairs: EUR/GBP, AUD/NZD
• Exotic pairs: USD/TRY, EUR/SEK

Each pair has a base currency (first) and a quote currency (second). If EUR/USD = 1.1000, it means 1 euro is worth 1.10 US dollars.

2. Market Participants

• Retail Traders: Individuals trading via brokers.
• Banks & Institutions: Trade in huge volumes, influencing price.
• Central Banks: Control monetary policy and often intervene.
• Corporations: Use forex to hedge currency risk from global transactions.

3. Trading Platforms

To access the market, traders use platforms like:

• MetaTrader 4 (MT4)
• MetaTrader 5 (MT5)
• cTrader
  These platforms connect to a broker who executes the trades.

4. Making a Trade

Every trade involves:

• Buying (going long) if you expect the currency to rise.
• Selling (going short) if you expect it to fall.
  You enter the market at a specific price, set a stop-loss to limit risk, and a take-profit to lock in gains.

5. Profit and Loss

Your profit or loss depends on:

• The size of the move (measured in pips).
• The lot size (trade volume).
• Your leverage and position size.

What Moves Forex Prices?

Fundamental Factors

• Interest Rates: Higher rates attract capital inflows.
• Economic Indicators: GDP, inflation, employment, etc.
• Geopolitical Events: Wars, elections, or trade policies.

Technical Factors

• Support and Resistance Levels
• Chart Patterns
• Indicators: RSI, MACD, moving averages

Traders use a combination of both to predict where the market may go next.

Leverage and Margin in Forex

Forex allows leverage, which means you can control a large position with a small deposit. For example, 30:1 leverage means you can control £30,000 with just £1,000 of capital. While leverage increases potential profits, it also magnifies losses.

Margin is the amount of money required to open a leveraged position. If your losses exceed the margin, your trade may be closed automatically.

Case Study: How Structured Education Helps Understand Forex

Sam, a student from London, joined our CPD Accredited Mini MBA in Applied Professional Forex Trading after watching YouTube videos that left him confused. Through our structured modules, he learned how the forex market functions, how brokers operate, and how to trade responsibly using leverage and technical analysis. Within three months, he moved from a demo to a live account and began making informed trades — a transformation driven by understanding, not guesswork.

Fundamental Vs Technical Analysis

Aspect	Fundamental Analysis	Technical Analysis
Focus	Economic data, interest rates, news	Price charts, indicators, candlestick patterns
Time Horizon	Medium to long-term	Short to medium-term
Used For	Directional bias	Entry/exit precision
Tools	Central bank statements, GDP, inflation reports	Trendlines, RSI, MACD, moving averages

Both approaches are essential in understanding how the forex market works and how to identify profitable opportunities.

Frequently Asked Questions

How does forex trading make money?

You earn money by buying a currency pair at a low price and selling it higher (or vice versa). Profit is based on the change in exchange rate.

Is forex trading legal in the UK?

Yes, forex trading is legal and regulated by the Financial Conduct Authority (FCA). Always choose an FCA-authorised broker.

Do I need a lot of money to start forex trading?

No, many brokers allow you to start with as little as £100. However, you should focus on education and risk management.

Can I trade forex full-time?

Yes, but only after developing consistent profitability and experience. Most traders start part-time while learning.

Is forex trading gambling?

No, forex trading is a skill-based activity. While it involves risk, successful traders use analysis and discipline, not chance.

To fully understand how forex trading works and build the skills to succeed, explore our Trading Courses — developed to take you from beginner to confident trader with real-world strategies and expert support.

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