What is Forex Trading

What is forex?

Forex is the global financial market where currencies are bought and sold.

If you think one currency will become stronger than another, and if you’re right, then you can make money.

In fact, you’ve probably already participated in Forex without even realizing it!

Have you ever traveled to another country? If so, you’ve probably exchanged your local money for the country’s currency.

That’s Forex in action!

For example, if you traveled from the U.S. to Europe, you would exchange your U.S. dollars (USD) for euros (EUR) at a currency exchange booth.

The exchange rate at that moment would determine how many euros you get for your dollars.

Later, when you return home, you exchange your leftover euros back into dollars.

But wait!

The exchange rate has changed. If the euro became stronger while you were away, you’d get more dollars back. If it became weaker, you’d get less.

This is exactly how Forex trading works!

But instead of exchanging money for travel, Forex traders buy and sell currencies to make a profit. They try to predict which currency will rise in value and which will fall.

If they’re right, they make money!

That’s Forex in a nutshell — trading one currency for another, just like at a currency exchange, but with the goal of making money!

The forex market: Where money never sleeps

Forex, also known as FX trading or foreign exchange trading, is the largest financial market in the world.

Every day, over $7.5 trillion is traded, making it even bigger than all other financial markets combined!

But wait… where does all this trading happen?

Unlike stock markets, which have central exchanges like the New York Stock Exchange (NYSE), Forex is decentralized.

That means there’s no single location where all the trading takes place. Instead, Forex operates through a global network of banks, financial institutions, and individual traders who trade electronically.

And here’s what makes Forex even more exciting: it runs 24 hours a day, five days a week!

Most financial markets open in the morning and close in the evening, but not Forex. Since different financial markets like London, New York, Tokyo, and Sydney open and close at different times, the market is always moving. This means that no matter what time it is, somewhere in the world, currencies are being traded, creating endless opportunities to trade!

Since currency prices are always fluctuating, traders look for ways to profit from these price changes — buying when they expect a currency to rise and selling when they expect it to fall.

That’s what makes Forex so exciting — a global, nonstop marketplace where traders make money by exchanging one currency for another!

So far, you’ve got a solid understanding of Forex trading.

But what exactly is being traded?

What is traded in forex?

In Forex, you trade currencies — but not in the way you might think. You’re not walking into a bank and physically exchanging cash.

Instead, you’re trading currency pairs, speculating on how one currency will move against another.

Currencies always come in pairs because their value is measured relative to another currency.

For example:

If you think the Euro will strengthen against the U.S. Dollar, you would buy the EUR/USD pair.

If you believe the Japanese Yen will weaken against the British Pound, you would buy the GBP/JPY pair.

But what do these pairs actually mean? Let’s break them down.

Understanding currency pairs

Each currency pair consists of two parts:

Base currency

The first currency in the pair (e.g., EUR in EUR/USD).

This is the currency you’re buying or selling.

The price of the pair tells you how much of the quote currency is needed to buy one unit of the base currency.

Quote currency

The second currency in the pair (e.g., USD in EUR/USD).

This is the currency you’re using to buy or sell the base currency.

Also known as the counter or terms currency.

Breaking Down a Trade Example

Let’s say you see this currency pair:

EUR/USD = 1.10

This means:

1 Euro is worth 1.10 U.S. Dollars.

If you want to buy €10,000, you would need to pay $11,000 (10,000 × 1.10).

Think of it like a price tag:

The base currency (EUR) is what you’re buying.

The quote currency (USD) is the price you pay for it.

If the exchange rate changes to EUR/USD = 1.15, it means:

The euro has become stronger (appreciated) compared to the dollar.

If you sell your euros now, you will get more dollars back.

If the rate drops to 1.05, it means:

The euro has weakened (depreciated).

Selling now would give you fewer dollars than before.

Not All Currency Pairs Are the Same!

Some currency pairs are highly traded and stable, while others are more volatile and less liquid.

Which ones should you trade? Let’s break them down!

Types of currency pairs

Currency pairs in Forex are divided into three main categories:

Major pairs – The most traded currencies

Major pairs are the most actively traded currency pairs in the Forex market. They always include the U.S. dollar (USD) and have the highest liquidity, meaning they are easier to trade, with lower transaction costs and tighter spreads.

These pairs represent some of the world’s largest economies and are widely followed by traders. Because they have a high trading volume, price movements tend to be smoother and more predictable compared to other pairs.

Examples of major pairs:

EUR/USD (Euro / U.S. Dollar)

GBP/USD (British Pound / U.S. Dollar)

USD/JPY (U.S. Dollar / Japanese Yen)

USD/CHF (U.S. Dollar / Swiss Franc)

AUD/USD (Australian Dollar / U.S. Dollar)

USD/CAD (U.S. Dollar / Canadian Dollar)

NZD/USD (New Zealand Dollar / U.S. Dollar)

Major pairs are often preferred by beginners due to their lower volatility and easier price movements.

Minor pairs – Well-traded, but without the U.S. dollar

Minor pairs, also called cross currency pairs, do not include the U.S. dollar. These pairs are still actively traded, but they tend to have slightly wider spreads and less liquidity than major pairs.

Minor pairs usually involve the euro (EUR), British pound (GBP), Japanese yen (JPY), or other major global currencies. They can be more volatile than major pairs because they are traded less frequently, leading to sharper price movements.

Examples of minor pairs:

EUR/GBP (Euro / British Pound)

EUR/JPY (Euro / Japanese Yen)

GBP/JPY (British Pound / Japanese Yen)

AUD/NZD (Australian Dollar / New Zealand Dollar)

CAD/JPY (Canadian Dollar / Japanese Yen)

Traders who want to diversify beyond major pairs often trade minor pairs to find different price patterns and unique trading opportunities.

Exotic pairs – High risk, high reward

Exotic pairs consist of one major currency paired with a currency from an emerging or smaller economy. These pairs are far less liquid, meaning they have larger price swings and higher transaction costs due to wider spreads.

Exotic pairs can be highly volatile, making them riskier for traders. Prices can move unpredictably due to political events, economic instability, and lower trading volume.

Examples of exotic pairs:

USD/TRY (U.S. Dollar / Turkish Lira)

EUR/ZAR (Euro / South African Rand)

USD/MXN (U.S. Dollar / Mexican Peso)

USD/SGD (U.S. Dollar / Singapore Dollar)

EUR/PLN (Euro / Polish Zloty)

Exotic pairs are typically traded by experienced traders who understand the risks and are looking for larger price movements to capitalize on.

Which currency pairs should you trade?

If you’re a beginner, it’s best to stick with major pairs because they are more stable and have lower trading costs.

If you want to explore new opportunities, minor pairs offer different market conditions and price behaviors.

If you’re an advanced trader, exotic pairs can be appealing due to high volatility, but they come with greater risk.

Choosing the right currency pairs depends on your trading style, risk tolerance, and market knowledge.

How to trade forex

Now that you understand what Forex is and what is traded, it’s time to break down how to actually trade. Trading Forex isn’t just about hitting a buy or sell button — it requires understanding how currency pairs work, how prices are quoted, and how profits and losses are measured.

Let’s go step by step.

Buying and selling currency pairs

Forex trading always involves buying one currency and selling another at the same time. Since currencies are traded in pairs, their values are always compared against each other.

Think of it like a see-saw:

If one currency goes up, the other goes down.

If one currency weakens, the other strengthens in comparison.

How do you make money?

When trading Forex, you can:

Buy (go long) if you think the base currency will increase in value.

Sell (go short) if you think the base currency will decrease in value.

Example 1: Buying (Going Long) EUR/USD

Let’s say you believe the euro will increase in value against the U.S. dollar.

You buy EUR/USD at 1.1000.

Later, the price moved to 1.1050.

You close your trade and make 50 pips in profit.

Example 2: Selling (Going Short) GBP/USD

Now, suppose you believe the British pound will weaken against the U.S. dollar.

You sell GBP/USD at 1.2500.

The price drops to 1.2450.

You close your trade and make 50 pips in profit.

How to Read Forex Quotes

When you look at a currency pair, you’ll see two prices:

Example: EUR/USD = 1.1050 / 1.1052

This means:

1.1050 is the bid price (the price at which you sell).

1.1052 is the ask price (the price at which you buy).

The difference between these two prices is called the spread (more on this later).

If the price goes up, the base currency is getting stronger.

If the price goes down, the base currency is getting weaker.

Understanding pips, lots, and leverage

Now that you know how currency pairs work, let’s talk about how price movements are measured and how trade sizes work.

What is a pip?

A pip (short for “percentage in point”) is the smallest standard unit of price movement in Forex trading. Since exchange rates are constantly fluctuating, traders use pips to measure how much a currency pair has moved.

Think of a pip as a tiny step in price movement — it may seem small, but when trading larger lot sizes, even a few pips can make a big difference!

In most currency pairs, a pip is the fourth decimal place (0.0001).

In JPY pairs, a pip is the second decimal place (0.01).

Example 1: Pip Movement in Most Pairs

If EUR/USD moves from 1.1000 to 1.1001, that’s a 1-pip move.

If it moves from 1.1000 to 1.1010, that’s a 10-pip move.

Since Forex prices move in very small increments, pips standardize price changes across different currency pairs.

What is a pipette?

A pipette is an even smaller price movement — one-tenth of a pip. Some brokers display currency quotes with an extra decimal place for more precise pricing.

If EUR/USD moves from 1.10000 to 1.10001, that’s one pipette.

If USD/JPY moves from 130.500 to 130.501, that’s one pipette.

A pipette is 1/10th of a pip, meaning 10 pipettes = one pip.

What is a lot?

Imagine you’re at the grocery store buying eggs.

You walk up to the shelf and see that eggs aren’t sold individually — you have to buy them in fixed amounts: a carton of 12, a tray of 30, or even a bulk pack of 100.

Forex works the same way. You don’t buy a single unit of currency; instead, you trade in lots, which are standardized amounts of currency. The size of your lot determines how much each price movement (pip) is worth — just like how buying a larger pack of eggs means a bigger purchase.

Types of lots

There are four main lot sizes in Forex:

Standard Lot = 100,000 units of the base currency

Mini Lot = 10,000 units

Micro Lot = 1,000 units

Nano Lot = 100 units

The lot size you choose affects how much each pip movement is worth.

What is leverage in forex?

Leverage lets you trade with more money than you actually have. It’s like a boost from your broker that allows you to control a larger trade size with a small deposit. This means you can potentially make bigger profits, but it also increases your risk if the market moves against you.

If your broker offers 1:100 leverage, it means that for every $1 in your account, you can trade $100. So, if you have $1,000, you can control a trade size of $100,000.

Let's understand this with an example.

Let’s say you have $1,000 in your trading account, and you want to trade EUR/USD.

Without leverage, you can only trade $1,000 worth of currency. If the price moves 10 pips, you might make or lose $1.

With 1:100 leverage, you can trade $100,000 worth of currency. If the price moves 10 pips, you could make or lose $100 instead of just $1.

This sounds great, right? More leverage = bigger profits!

But here’s the problem: it also means bigger losses.

Imagine you use 1:100 leverage and open a $100,000 trade with only $1,000 in your account.

If the trade moves 10 pips in your favor, you make $100.

If the trade moves 10 pips against you, you lose $100.

If the trade moves 100 pips against you, you lose your entire $1,000 account!

This is why leverage can be risky. If the market moves too much in the wrong direction, your losses can wipe out your account fast.

What is a spread in forex?

Every time you place a trade in Forex, you’ll notice that there are two prices — the bid price (the price you sell at) and the ask price (the price you buy at). The difference between these two prices is called the spread.

The spread is essentially the cost of entering a trade, and it’s how most brokers make money. Before you can start making a profit, the market needs to move in your favor by at least the amount of the spread.

How Spreads Work

Let’s say you check the price of EUR/USD and see:

Bid price: 1.1000

Ask price: 1.1002

The spread here is two pips (1.1002 - 1.1000 = 0.0002 or 2 pips).

If you enter a buy trade at 1.1002, you start at a loss because if you immediately close the trade, you will sell at 1.1000, losing two pips. The price needs to go above 1.1002 for you to start making a profit.

This is why traders prefer lower spreads— it reduces the cost of trading and allows them to enter profit faster.

Types of spreads

There are two main types of spreads: fixed spreads and variable (floating) spreads.

Fixed spreads

Fixed spreads stay the same regardless of market conditions. Some brokers set a fixed spread so traders know exactly what their trading cost will be at all times.

This can be helpful because it provides consistency, especially for beginners who don’t want unpredictable trading costs. However, fixed spreads can sometimes be slightly higher than variable spreads, especially during calm market conditions when variable spreads are usually tighter.

Advantages:

• Spreads do not change, even during high volatility.
• More predictable trading costs.
• Often require lower initial deposits, making them good for beginners.

Disadvantages:

• Spreads can be higher than variable spreads during normal market conditions.
• Slippage may occur when brokers re-quote prices during volatile market movements.

Variable spreads

Variable spreads are spreads that constantly change based on market conditions. Instead of staying the same, the difference between the bid and ask prices expands or shrinks depending on how much activity is happening in the market.

These spreads are provided by non-dealing desk brokers, who get their prices directly from multiple liquidity providers. Since there’s no broker intervention, the spread naturally tightens when liquidity is high and widens when the market is volatile or slow.

For example, during the London and New York sessions, when lots of traders are active, spreads tend to be lower because there’s plenty of buying and selling. But during major news events or when liquidity is low — like on weekends or holidays — spreads can increase significantly as fewer traders are in the market.

Unlike fixed spreads, which stay the same regardless of market conditions, variable spreads fluctuate based on supply and demand, giving traders a more direct reflection of real market pricing.

Advantages:

• Spreads are lower when market liquidity is high, reducing trading costs.
• No requotes since prices come directly from liquidity providers.
• More transparency because spreads reflect actual market conditions.

Disadvantages:

• Spreads widen during market volatility, making trades more expensive.
• Harder to predict costs, which can impact short-term trading strategies.

Which is better: Fixed or variable spreads?

The answer? It depends on how you trade!

If you like predictability and don’t want any surprises, fixed spreads are the way to go. They stay the same no matter what’s happening in the market, so you always know your trading costs. But there’s a catch — they can be higher than variable spreads during normal conditions, and some brokers might re-quote your price when the market moves fast.

On the other hand, variable spreads can be cheaper most of the time, especially during high liquidity hours.

If you’re a scalper or day trader, variable spreads give you better pricing — but only if you trade when the market is active.

The downside?

They can widen like crazy during news events or low-volume periods, making trades unexpectedly expensive.

So, which one is better? If you want stability, go with fixed spreads.

If you’re after lower costs and can avoid volatile times, variable spreads might save you money in the long run!

Forex trading session

The Forex market is open 24 hours a day, five days a week, but that doesn’t mean it’s always busy. There are times when the market moves a lot and times when it barely moves at all.

This is because Forex trading happens in different parts of the world at different times. Instead of having one central exchange, the market follows the business hours of major financial centers.

There are three main trading sessions when the market is most active:

1. Tokyo Session (Asian Session)

2. London Session (European Session)

3. New York Session (North American Session)

Each session has its own unique characteristics, and understanding them can help traders choose the best time to trade.

Tokyo session (asian session) – The first to open

Opens: 12:00 AM GMT

Closes: 9:00 AM GMT

The Tokyo session is the first major session to open each day. Japan is a big player in global finance, so the Japanese yen (JPY) is the most traded currency during this session.

During the Tokyo session:

• JPY pairs like USD/JPY and EUR/JPY are the most active because Japan’s banks and businesses are open.
• The market is generally quieter compared to later sessions, with fewer big price moves.
• Currencies from Australia and New Zealand (AUD and NZD) also see some movement since these countries have close trade ties with Asia.

Price movements during the Tokyo session are usually smaller and more stable. This session is important because it sets the tone for the rest of the trading day.

London session (european session) – Where the action happens

Opens: 8:00 AM GMT

Closes: 5:00 PM GMT

The London session is the busiest and most important Forex trading session. London is one of the world’s biggest financial centers, and nearly one-third of all Forex trades happen during this time.

During the London session:

• Liquidity is high, which means there are many buyers and sellers, so trades happen quickly.
• Major currency pairs involving GBP, EUR, and CHF see strong movements as European banks, companies, and traders enter the market.
• Price moves are bigger, making this session great for traders who like more action.

Since this session overlaps with the Tokyo session at the start and the New York session later in the day, it connects different parts of the world, increasing market activity.

New York session (north american session) – Big price moves

Opens: 1:00 PM GMT

Closes: 10:00 PM GMT

The New York session is the second-largest Forex session, with the U.S. dollar (USD) involved in nearly 90% of all trades. This makes it a very important part of the trading day.

During the New York session:

• The first few hours overlap with the London session, making this the most active time of the day.
• USD pairs like EUR/USD, GBP/USD, and USD/JPY see big price swings, especially when major U.S. economic news is released.
• After London closes, the market slows down, but USD pairs can still move depending on U.S. stock market activity.

This session is known for strong trends and big price changes, especially during the London-New York overlap.

Best time to trade forex: Session overlaps

The best trading opportunities usually happen when two major sessions are open at the same time. This is called a session overlap, and it creates more liquidity and stronger price movements.

London – New York overlap (1:00 PM – 5:00 PM GMT)

The busiest and most volatile time of the day.

Large financial institutions and traders from both Europe and the U.S. are active.

Major pairs like EUR/USD and GBP/USD make big moves during this period.

Tokyo – London overlap (8:00 AM – 9:00 AM GMT)

A short transition between the Asian and European markets.

JPY pairs may experience increased movement as Tokyo traders finish their day and London traders start theirs.

Since liquidity is highest during these overlaps, traders can benefit from faster trade execution, tighter spreads, and more trading opportunities.

Trading activity throughout the day

The Tokyo session starts the trading day with slower price movements and steady trends.

The London session increases activity, bringing strong trends and higher volatility.

The New York session continues the action, especially in USD pairs, with major price swings.

Understanding Forex trading sessions helps traders identify the best times to trade, ensuring they enter the market when liquidity is high and price movements are strong.

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