Forex trading explained: How to trade forex

Forex trading is the process of buying and selling international currencies with the objective of making a profit from fluctuations in the exchange rates between different currencies.

The term ‘forex’ stands for foreign exchange. Forex market allows trading fiat currencies of different countries against each other. For example, trading British pound against the US dollar (GBP/USD).

What is forex trading?

Forex trading, or foreign exchange trading (FX), involves buying and selling currency pairs to potentially profit from fluctuations in exchange rates.

Unlike stocks and commodities, which are traded on regulated central exchanges, currencies are traded over-the-counter (OTC). This means trades occur directly between institutional participants in major forex trading centers around the globe, known as the interbank market.
The largest and most liquid forex trading centers are London and New York, with Tokyo, Hong Kong, Frankfurt, and Singapore also playing significant roles in global currency trading.

What is the forex market?

Forex is the largest and most active financial market globally, with nearly $7 trillion in daily transactions. It is the biggest market by both trading volume and value.

Due to its global scope, forex trading operates 24 hours a day during the business week, setting the exchange rates for all world currencies.

How does forex trading work?

In forex trading, investors trade currency pairs, sometimes known as "crosses" when they do not include the US dollar, to capitalize on fluctuations in exchange rates. The process involves buying one currency while simultaneously selling another, aiming to profit by selling a currency at a higher value than the purchase price.

Each currency pair consists of a base currency and a quote currency. The exchange rate indicates how much of the quote currency is needed to purchase one unit of the base currency. Currencies are represented by three-letter codes, with the first two letters often denoting the country and the third representing the currency (e.g., USD for US dollar, CAD for Canadian dollar, NOK for Norwegian krone). Notable exceptions include EUR for euro and MXN for Mexican peso.

Popular forex pairs include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/JPY), and the British pound against the US dollar (GBP/USD). Traders buy or sell these pairs based on their expectations of currency movements. For instance, if a trader anticipates that the euro will strengthen against the dollar due to favorable economic data in the eurozone, they might take a long position on the EUR/USD pair. Conversely, if they expect the euro to weaken, they might short the pair.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.