Forex trading, also known as foreign exchange trading, is the process of exchanging one currency for another to profit from changes in exchange rates. This guide answers the question how does it work forex trading by explaining the mechanics, participants, tools, and techniques involved in the world’s most liquid financial market.

What This Article Covers

• The mechanics behind forex trading and how profits are made
• Who participates in the forex market
• Key terms and market structure
• A beginner-friendly breakdown of a trade
• Analysis methods and real-world example
• FAQs for quick understanding

What Is Forex Trading?

Forex trading involves buying one currency and simultaneously selling another. These transactions happen in currency pairs like EUR/USD or GBP/JPY. When you predict that one currency will strengthen relative to another, you enter a trade in that direction. If you’re correct, you earn a profit from the change in exchange rate.

The forex market is decentralised and operates 24 hours a day, five days a week, across major financial hubs like London, New York, and Tokyo.

Key Takeaways

• Forex trading is the exchange of currency pairs for profit
• Currencies are always traded in pairs, such as USD/JPY or GBP/USD
• Traders profit from price fluctuations between currencies
• It operates 24/5 and is driven by economic, geopolitical, and technical factors
• You can trade via online brokers with leverage and risk controls

How Forex Trading Works

Currency Pairs

In forex, you trade currency pairs such as EUR/USD. The first currency is the base, and the second is the quote. If EUR/USD is at 1.1000, it means €1 = $1.10. You profit if the rate moves in your favour after entering a position.

Bid, Ask, and Spread

• Bid: Price you can sell the base currency
• Ask: Price you can buy the base currency
• Spread: The difference between bid and ask; it’s the broker’s fee

How Profit Is Made

Let’s say you buy GBP/USD at 1.2500, expecting the pound to rise. If the price rises to 1.2600 and you sell, you’ve made 100 pips of profit. With a £10-per-pip position, you earn £1,000.

Participants in the Forex Market

• Central Banks – Influence currency supply through monetary policy
• Commercial Banks – Conduct large-volume transactions
• Corporations – Exchange currency for international business
• Retail Traders – Individuals trading via online platforms
• Hedge Funds – Trade for speculative gains at scale

Step-by-Step Example of a Forex Trade

1. Choose a pair – e.g., GBP/JPY
2. Analyse the chart and news – Use tools like RSI, Ichimoku, and interest rate forecasts
3. Decide direction – Buy if you expect GBP to rise, or sell if you expect JPY to strengthen
4. Set trade size – Based on account size and risk management
5. Enter trade – Using market or pending orders
6. Set stop-loss and take-profit – To manage risk and lock in profit
7. Monitor and close trade – When your conditions are met or manually based on analysis

Types of Analysis in Forex

Technical Analysis

• Based on price charts, patterns, and indicators
• Popular tools: Moving Averages, RSI, MACD, Fibonacci

Fundamental Analysis

• Based on economic indicators like GDP, inflation, and interest rates
• Central bank decisions, employment data, and geopolitical events are key triggers

Sentiment Analysis

• Gauges the mood of the market using positioning data and news flow
• Useful in contrarian strategies when the market is overly bullish or bearish

Real-World Case Study: How a Student Learned the Mechanics

A student enrolled in the CPD Accredited Mini MBA in Forex Trading from Traders MBA. During a live mentorship session, they were guided through a EUR/USD trade.

Using fundamental analysis, they saw the US releasing weaker-than-expected job data, weakening the USD. With Ichimoku confirmation and RSI divergence, they went long on EUR/USD. The trade moved 80 pips in their favour. The mentor explained position sizing and stop-loss placement, helping them learn how forex trading works step by step in a live environment.

Frequently Asked Questions

How do you make money in forex trading?

You profit by correctly predicting the movement of a currency pair. If you buy low and sell high, or sell high and buy low, the difference is your gain.

Is forex trading risky?

Yes, it carries risk due to leverage and market volatility. But using stop-loss orders and proper risk management can reduce exposure.

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

No. Many brokers allow you to start with as little as £100, though having more capital offers better flexibility.

Can I lose more than I invest in forex?

With reputable brokers offering negative balance protection, you typically can’t lose more than your deposit. Always check the broker’s terms.

Is forex trading the same as stock trading?

No. Forex involves currencies, not company shares. It’s more liquid, operates 24/5, and usually has higher leverage than stock trading.

Conclusion

Forex trading works through the buying and selling of currency pairs in anticipation of exchange rate movements. By using technical, fundamental, and sentiment analysis, and following disciplined risk management, traders can build profitable strategies over time.

If you’re ready to master the process step by step, join our Forex Course and gain real-world insights into how forex trading really works.