Forex trading, or foreign exchange trading, is the process of buying and selling currencies with the aim of making a profit from changes in exchange rates. As the largest financial market in the world, forex operates 24 hours a day across major financial centres. Traders speculate on currency pairs such as GBP/USD, EUR/JPY, or AUD/CAD, profiting from market movements driven by economic data, geopolitical events, and central bank policies.

Key Takeaways

• Forex trading involves exchanging one currency for another at an agreed rate.
• Traders profit from price movements in currency pairs like EUR/USD or GBP/JPY.
• The market is decentralised, operating through global banks, brokers, and institutions.
• Leverage allows traders to control larger positions with smaller capital.
• The forex market runs 24 hours, 5 days a week across different global sessions.

Understanding the Basics of Forex Trading

Forex trading works by speculating on the value of one currency against another. These are traded in pairs. For example, in the pair GBP/USD:

• GBP is the base currency
• USD is the quote currency

If GBP/USD is trading at 1.2500, this means one pound equals 1.25 US dollars. If you believe the pound will strengthen, you buy the pair (go long). If you believe it will weaken, you sell the pair (go short).

How Forex Prices Move

Prices in forex are influenced by:

• Interest rates set by central banks
• Inflation and economic growth
• Political stability and global events
• Trade balances and demand for imports/exports
• Speculation and sentiment

Even a single economic release, like Non-Farm Payrolls or a surprise rate decision, can cause significant price movement.

The Role of Leverage and Margin

Forex brokers often offer leverage, allowing traders to control a larger position with a smaller capital outlay.

Example:

• With 50:1 leverage, £1,000 can control a £50,000 position.
• If the market moves 1%, you gain or lose £500, not £10.

While leverage increases potential profits, it also magnifies risk. This is why risk management is essential.

Execution Models in Forex Trading

There are several ways forex trades are executed:

• Market Makers: Brokers quote buy/sell prices and take the other side of your trade.
• ECN Brokers: Connect you directly to other market participants for tighter spreads.
• STP (Straight Through Processing): Your order is routed to a liquidity provider with minimal dealing desk intervention.

Case Study: How a Beginner Learned to Trade Forex

Emma, a university graduate in the UK, began forex trading after enrolling in one of our beginner Trading Courses. She started with a demo account to understand how to go long or short on pairs like EUR/USD. After learning how to manage leverage and use a stop-loss, she transitioned to live trading and achieved consistent results by following a structured trading plan and daily economic calendar.

Fundamental vs Technical Approach to Forex Trading

Aspect	Fundamental Analysis	Technical Analysis
Focus	Economic indicators, news, policy	Charts, price patterns, indicators
Strategy Basis	Macro trends and central bank moves	Support/resistance, trendlines, indicators
Tools Used	Economic calendars, inflation data	Moving averages, RSI, MACD, candlestick patterns
Ideal For	Medium/long-term position trades	Short-term swing or intraday trades

Frequently Asked Questions

What is traded in the forex market?
Currencies are traded in pairs, like GBP/USD, EUR/JPY, or USD/CHF.

How do you make money in forex trading?
By buying low and selling high, or selling high and buying low — depending on market direction.

Can beginners trade forex?
Yes, but it’s vital to start with proper education and risk management.

Is forex trading legal in the UK?
Yes, it is legal and regulated by the Financial Conduct Authority (FCA).

How risky is forex trading?
Forex trading carries risk due to leverage and volatility. Losses can exceed deposits without proper risk control.

Conclusion

Forex trading works by capitalising on price fluctuations in currency pairs, offering both opportunities and risks. With 24-hour access, leverage, and deep liquidity, it’s a dynamic market that attracts traders globally. However, understanding how forex trading works — from market mechanics to analysis methods — is essential before committing capital. To accelerate your forex learning curve, consider joining one of our practical Trading Courses taught by industry professionals.