Forex Trading: A Comprehensive Guide to Foreign Currencies from A to Z

The foreign exchange market represents a real meeting point between investors, banks, and companies around the world. Every time you convert your currency before traveling or pay for a good in a foreign currency, you are actually participating in this massive, constantly beating market. The forex market is the largest globally in terms of trading volume, with an average daily trading volume of $9.6 trillion according to the latest statistics for April 2025, a figure that far exceeds the combined trading in stock markets. Behind this enormous size lies the reliance of the global economy on continuous currency exchanges.

What is Forex Trading?

Forex simply is the foreign exchange market, where currencies are traded continuously among individuals, institutions, banks, and governments via a global network. When you trade forex, you are essentially buying one currency and selling another at the same time, aiming to profit from price differences.

You always deal with currency pairs like EUR/USD or USD/JPY. The first currency is called the base currency, while the second is the quote currency. The displayed price tells you how many units of the quote currency you need to buy one unit of the base currency.

This market is distinguished by being decentralized. Unlike stock markets, there is no single central exchange. Instead, it relies on a global electronic network of banks and financial institutions communicating with each other to execute trades.

Key Figures to Know About the Forex Market

• Largest and most active: The forex market surpasses any other in size, liquidity, and activity rate.
• Operates 24 hours: Trading continues 24 hours a day, five days a week, starting from Sydney’s open, passing through Tokyo and London, to New York.
• Always traded in pairs: You cannot buy or sell a single currency, only in exchange for another.
• No real stop: Thanks to overlapping trading sessions, the market is active almost all the time.

How Does Forex Trading Actually Work?

Forex trading is based on a simple principle: comparing two currencies. You cannot evaluate the value of a currency without comparing it to another. Therefore, prices always appear as pairs.

When you make your decision:

• Buy = your expectation that the base currency will rise against the quote currency
• Sell = your expectation that the base currency will fall against the quote currency

Since currency movements depend on the relationship between two currencies, an increase in one necessarily means a decrease in the other, making this market based on constant comparison of strength and weakness.

Types of Currency Pairs in Forex Trading

1- Major Pairs (Majors)

Include the most traded currencies worldwide, representing giant economies. They have high liquidity, narrow spreads, and dominate the majority of daily trading.

Notable examples:

• EUR/USD – Euro vs. US Dollar
• USD/JPY – US Dollar vs. Japanese Yen
• GBP/USD – British Pound vs. US Dollar
• AUD/USD – Australian Dollar vs. US Dollar
• USD/CHF – US Dollar vs. Swiss Franc
• USD/CAD – US Dollar vs. Canadian Dollar

2- Minor Pairs (Minors)

Also known as cross pairs because they do not include the US Dollar. Less active than majors but common, with higher trading costs due to wider spreads.

Examples:

• EUR/GBP – Euro vs. British Pound
• EUR/CHF – Euro vs. Swiss Franc
• GBP/JPY – British Pound vs. Japanese Yen

3- Exotic Pairs (Exotics)

Combine a strong currency with a currency from a developing economy. Characterized by higher volatility and wider spreads, suitable only for experienced traders.

Examples:

• USD/MXN – US Dollar vs. Mexican Peso
• USD/THB – US Dollar vs. Thai Baht

Basic Terms You Should Know

Spread: The difference between the bid and ask price. Example: if the bid is 1.1050 and the ask is 1.1048, the spread = 2 pips.

Lot: The unit of measurement for trade size. Divided into standard, mini, and micro lots to facilitate risk management.

Pip: The smallest price movement, usually the fourth decimal place. Example: moving from 1.1000 to 1.1001 = 1 pip.

Leverage: A tool that allows increasing the size of a trade using a small capital. Example: with 1:100 leverage, you can trade $10,000 with only $100 of your own capital.

Margin: The amount required as collateral to open a trade. It allows increasing trade size but also doubles potential losses.

Forex Market Trading Hours

The market operates 24 hours a day, 5 days a week. Trading begins with the opening of Sydney’s session on Monday morning and continues until the close of New York’s session on Friday evening. At 5:00 PM New York time, the so-called Rollover occurs, where trades are automatically renewed.

Best trading times: During overlaps of major sessions, especially London and New York, when activity and liquidity increase significantly. Conversely, activity tends to decrease during Asia’s session.

Factors Affecting Currency Movements

( Central Banks and Interest Rates Decisions by central banks directly influence currency value. Raising interest rates makes a currency more attractive, while lowering them reduces demand. In 2022, the Federal Reserve raised interest rates consecutively, causing the dollar to rise against most major currencies.

) Inflation and Economic Growth High inflation diminishes the currency’s purchasing power, while strong economic growth attracts investments and strengthens the currency.

Government Intervention

Central banks sometimes intervene directly to support or devalue their currency. Example: Plaza Accord in 1985, where multiple countries cooperated to lower the dollar’s value.

Crises and Geopolitical Stability

Unstable political events push investors toward “safe-haven” currencies like the dollar and yen. During the COVID-19 pandemic, investors flocked to the dollar and yen as safe assets.

Main Trading Styles

Long-term Forex Trading

Focuses on holding positions for weeks, months, or even years. Relies on fundamental analysis such as economic growth and interest rates. Requires patience and discipline.

Advantages: flexibility in monitoring, less psychological pressure, time for detailed analysis.

Short-term Forex Trading

Focuses on daily or intraday price movements to achieve quick profits. Trades last from minutes to a few days.

Advantages: faster profit potential, benefit from daily volatility, reduced overnight risk.

Popular Forex Trading Strategies

Scalping ###: Opening and closing trades within seconds or minutes to profit from small points.

Day Trading: Opening and closing all trades within the same day, avoiding overnight risks.

Swing Trading: Holding trades for several days or weeks to capitalize on medium-term trends.

Trend Following: Buying during upward trends and selling during downward trends, using indicators like moving averages.

Advantages of Forex Trading

✅ 24-Hour Trading: The market is always open, giving you flexibility in choosing when to trade.

✅ Low Capital Requirements: Start with a small capital thanks to leverage.

✅ High Liquidity and Easy Execution: Execute large trades without significantly impacting prices.

✅ Various Profit Opportunities: Benefit from short-term and long-term movements.

✅ Relatively Narrow Spreads: Lower trading costs compared to other markets.

Challenges of Forex Trading

❌ High Risks: Possibility of losing your entire capital due to rapid fluctuations.

❌ Difficulty in Learning: Requires advanced knowledge of technical and fundamental analysis.

❌ Continuous Volatility: Prices move quickly, increasing the risk of significant losses.

❌ Round-the-Clock Management: Prices can change while you are away, requiring advanced tools.

Important Technical Indicators

Moving Averages: Help identify overall trends and reduce the impact of daily fluctuations.

Relative Strength Index ###RSI(: Shows whether the price is overbought or oversold.

MACD Indicator: Indicates overall trend and potential market reversals.

Bollinger Bands: Reveal volatility levels and help anticipate sudden movements.

Support and Resistance Levels: Specific prices where the market tends to reverse, useful for buy and sell points.

Steps to Start Trading Forex

1. Choose a Reliable Trading Platform: Look for a regulated company that offers good analytical tools and low spreads.

2. Open a Trading Account: The first step to joining the market.

3. Start with a Demo Account: Most platforms offer demo accounts with virtual money to learn without risk.

4. Develop a Clear Plan: Define your capital, trade size, currency pairs, and profit goals.

5. Select Currency Pairs: Begin with the most liquid major pairs.

6. Use Protective Orders: Activate stop-loss and take-profit to protect your capital.

7. Manage Risks: Set a risk percentage per trade )1-2% of your capital( and avoid excessive leverage.

8. Monitor and Analyze: Use technical and fundamental analysis tools to follow market movements.

9. Evaluate Your Performance: After each trade, analyze what worked and what needs improvement.

10. Keep Learning: The market is always changing, so continuous education is essential.

Golden Tips for Beginners

💡 Study the market thoroughly before investing your money.

💡 Stick to your plan and don’t let emotions control your decisions.

💡 Start small and gradually increase as you gain experience.

💡 Use a demo account to practice your strategies first.

💡 Don’t overleverage despite the allure of bigger profits.

💡 Control your emotions and don’t let losses or greed dominate you.

Summary

The forex market offers a real opportunity for investors and traders to profit from currency movements. However, it requires a deep understanding of the market, a clear plan, and discipline in executing it. Whether you choose short-term or long-term trading, the key lies in continuous education, prudent risk management, and patience for results.

Forex trading is not just currency exchange; it’s an educational journey toward a deeper understanding of the global economy and market patterns. Start today with a demo account, practice what you’ve learned, and invest wisely.