Forex trading, short for foreign exchange trading, is the act of buying and selling currencies with the aim of making a profit. It is the largest financial market in the world, with over $7 trillion traded daily. This guide explains what forex trading is, how it works, and how individuals can start trading currencies successfully.

Key Takeaways

• Forex trading involves speculating on the price movements of currency pairs like EUR/USD or GBP/JPY.
• It operates 24 hours a day, five days a week, across major global trading sessions.
• The forex market is decentralised, meaning trades occur over-the-counter (OTC) through global networks.
• Leverage allows traders to control large positions with small capital, increasing both potential profits and risks.
• Success requires mastering chart analysis, understanding economic fundamentals, and managing risk effectively.

Understanding the Basics of Forex Trading

Forex trading is the simultaneous exchange of one currency for another. Currency pairs are quoted with a base currency and a quote currency.

For example:

• EUR/USD = 1.1200 means 1 Euro is worth 1.1200 US Dollars.
• If a trader believes the Euro will rise, they may buy the pair (go long).
• If they believe it will fall, they may sell the pair (go short).

Trades are typically measured in lots:

• Standard Lot = 100,000 units
• Mini Lot = 10,000 units
• Micro Lot = 1,000 units

How Does Forex Trading Work?

1. Speculation on Price Movements
   Traders aim to profit by predicting whether a currency pair will rise or fall.
2. Leverage
   Most brokers offer leverage, allowing traders to open larger positions with less capital. For example, 30:1 leverage means £1,000 controls £30,000.
3. Bid/Ask Spread
   • Bid: Price at which the broker buys from you
   • Ask: Price at which the broker sells to you
   • The difference is the spread, which is the broker’s fee.
4. Market Orders vs. Pending Orders
   • Market Order: Instant execution at current price
   • Pending Order: Execute trade when a specific price is reached
5. Profit & Loss
   Gains are measured in pips (percentage in points), the smallest movement a currency can make—usually 0.0001 for most pairs.

Who Participates in Forex Trading?

• Central Banks: Influence currency values through monetary policy.
• Commercial Banks: Engage in interbank forex trading.
• Hedge Funds & Institutions: Speculate for large-scale profits.
• Retail Traders: Individuals trading via online platforms.
• Corporations: Use forex markets to hedge currency exposure.

Why Forex Trading Is Popular

• High Liquidity: Trade large volumes without impacting price.
• Low Entry Barrier: Start with small capital on most platforms.
• Global Market Access: Trade from anywhere with an internet connection.
• Diverse Strategies: Scalping, day trading, swing trading, and long-term investing.

How To Get Started in Forex Trading

1. Learn the Fundamentals
   Understand pips, leverage, margin, and how trades are placed.
2. Open a Demo Account
   Practise risk-free on platforms like MT4 or TradingView.
3. Choose a Reliable Broker
   Look for regulation, low spreads, and good execution speed.
4. Develop a Trading Strategy
   Focus on one or two currency pairs and apply technical or fundamental analysis.
5. Risk Management
   Use stop-loss orders, calculate position sizes, and avoid overleveraging.
6. Take a Structured Course
   Join professional Trading Courses that teach everything from beginner concepts to advanced risk and strategy frameworks.

Fundamental vs Technical Analysis

Aspect	Fundamental Analysis	Technical Analysis
Focus	Economic data, interest rates, geopolitics	Charts, indicators, price patterns
Time Horizon	Medium to long-term	Short to medium-term
Tools Used	News, economic calendar, central bank reports	RSI, MACD, Moving Averages, Candlestick Charts
Objective	Understand intrinsic currency value	Identify optimal entry and exit points

Real-World Example of a Forex Trade

Imagine a trader believes the GBP will rise against the USD after strong UK GDP figures:

• Currency Pair: GBP/USD
• Trade Size: 1 lot (100,000 units)
• Entry Price: 1.2600
• Exit Price: 1.2700
• Gain: 100 pips = $1,000 if 1 pip = $10

If the trade went the other way, the loss would also be $1,000—highlighting the importance of risk control.

Frequently Asked Questions

What is forex trading?
Forex trading is the buying and selling of currencies to profit from changes in exchange rates.

How does forex trading work for beginners?
Beginners speculate on currency price movements using online platforms, typically starting with demo accounts and education.

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

Do I need a lot of money to start forex trading?
No, you can start with as little as £100 using micro lots and leverage, although more capital allows better risk control.

How do I learn forex trading properly?
Begin with structured education, demo practise, and mentorship through professional courses.