What is Forex & How Does It Work?

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.

All the world's combined stock markets don't even come close to this. But what does that mean to you? Take a closer look at forex trading and you may find some exciting trading opportunities unavailable with other investments.

What is the Forex Market?

If you've ever traveled overseas, you've made a forex transaction. Take a trip to France and you convert your pounds into euros. When you do this, the forex exchange rate between the two currencies—based on supply and demand—determines how many euros you get for your pounds. And the exchange rate fluctuates continuously.

A single pound on Monday could get you 1.19 euros. On Tuesday, 1.20 euros. This tiny change may not seem like a big deal. But think of it on a bigger scale. A large international company may need to pay overseas employees. Imagine what that could do to the bottom line if, like in the example above, simply exchanging one currency for another costs you more depending on when you do it? These few pennies add up quickly. In both cases, you—as a traveler or a business owner—may want to hold your money until the forex exchange rate is more favorable.

There are several key differences between swapping currencies abroad and buying or selling forex.

  • The first is convenience. The forex market is a decentralised, electronic exchange. Accordingly, participants are able to trade currencies from anywhere, anytime the market is open.
  • The second is efficiency. Forex traders enjoy the utmost in liquidy, which promotes tight spreads, regular volatilities and rock-bottom pricing.

Participating in the foreign exchange market is the easiest, most efficient way of exchanging currencies. You don't have to stand in line at a currency dealer and pay undue premiums to trade monies. Instead, you simply need computing power, internet connectivity and an FX broker to engage the world's currency markets.

Past Performance: Past Performance is not an indicator of future results.

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How Does Forex Trading Work?

On the foreign exchange market (forex), trade is conducted in an exclusively electronic format. Currency pairs are bought and sold 24 hours a day, 5 days a week by participants worldwide. Market participants engage the forex remotely, via internet connectivity.

Upon a trader sending a buy or sell order to the market, forex brokers facilitate the transaction by extending margin. Accordingly, the trader is able to open new positions far in excess of capital-on-hand, with the goal of realizing profits from beneficial movements in price. To complete each forex trade, the market's technological infrastructure matches contradictory orders from market makers, individual traders and other liquidity providers.

How to Start Forex Trading?

All forex trades involve two currencies because you're betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair.

Let's say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, and you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.

If the EUR/USD buy price is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.

Trading FX pairs in the contemporary forex marketplace is straightforward and user-friendly. Vast functionalities are readily available on the software trading platform designed to aid in analysis and trade execution. Some of the most powerful features are advanced charting applications, technical indicators and multiple order types. Whether you are an intraday scalper or long-term investor, modern platforms make it routine to conduct business with forex.

Pros and Cons of Trading Forex?

Like all markets, forex features a unique collection of pros and cons. For any aspiring currency market participant, it's important to conduct adequate due diligence and decide if forex trading is a suitable endeavour.

Remote accessibility, limited capital requirements and low operational costs are a few benefits that attract traders of all types to the foreign exchange markets. In addition, forex is the world's largest marketplace, meaning that consistent depth and liquidity are all but assured. Factor in a diverse array of products, and retail traders enjoy a high degree of strategic freedom.

However, there are several pitfalls of which to be aware. First, the availability of enhanced leverage and abundance of trading options can seriously test one's discipline. Also, pricing volatility can be swift and dramatic, posing the risk of rapid, significant loss. Lastly, past performance is not indicative of future results― forex trading is always changing, emphasizing the need for sound strategy and strong risk management.

Flexibility and diversity are perhaps the two biggest advantages to trading forex. The ability to open either a long or short position in the world's leading major, minor or exotic currencies affords traders countless strategic options.

What are forex pairs?

Forex pairs, also known as currency pairs, compare the values of two currencies. The first currency (known as the base – the currency being bought) is priced versus the second currency (quote), showing how much you need to pay in the quote currency to buy one base unit. Typically, each currency is named based on its three-letter ISO currency code (such as EUR for euro).

Common forex pairs include euro (EUR) to US dollar (USD), pound sterling (GBP) to euro, and US dollar to Japanese yen (JPY). In the first example, a currency pair might be expressed as 'EUR/USD: 1.01700'. This would mean that one euro is worth 1.01700 dollars.

Listings of forex pairs also show traders the bid and ask prices for the currency pair. These are the prices you must pay to buy or sell the pair respectively.

The bid price is always smaller than the ask price by a few pips, due to platform charges – this difference is called the bid-ask spread. Typically spreads are smaller on pairs with higher trading volumes. EUR/USD spreads are lower than those for JPY/HUF (Hungarian forint), for example. Note that the spread of each currency pair vary according to market conditions.

How does forex trading work?

At its most basic level, Forex trading works by buying currencies when their value is low and selling them when they increase.

This is done electronically over a trading platform. Forex trades can be made remotely worldwide, 24 hours a day, five days a week. Forex markets are open in every time zone, so as one closes, another opens:

  • Pacific session: Sydney, 10:00 PM to 7:00 AM UTC
  • Asian session: Tokyo, 12:00 AM to 9:00 AM UTC
  • European session: London, 8:00 AM to 5:00 PM UTC
  • American session: New York, 1:00 PM to 10:00 PM UTC

Whenever a trader sends an order to the forex market, brokers facilitate the transaction by extending margin. This allows the trader to open new positions far greater than the capital they have at hand to profit from beneficial increases or decreases in price. However, pricing volatility can pose the risk of rapid, significant loss.

To complete each forex trade, the market's technological infrastructure matches contradictory orders from market makers, individual traders, and other liquidity providers.

There are three ways that forex is most traded:

  • Spot market trades – The spot market is the main forex market that sees traders trading currencies over-the-counter (OTC) for real-time prices based on current supply and demand.
  • Futures market trades – This speculative trade sees traders enter contracts with one another to buy or sell forex at a specified exchange rate on a specific date. Futures trades are typically performed on a public exchange, for example, {suggest to list a UK exchange}. This benefits buyers if the seller agrees to sell at a rate that ends up lower than the future exchange rate, and vice versa.
  • Forward market trades – Forward market trades are the same as futures trades, except they are traded privately in an OTC market. That means they are less regulated and customisable. Non-deliverable forwards (NFDs) are a common type of forward market trade.

Note that FXCM only offers leveraged spot Forex trading.

What are the pros and cons of forex trading?

Forex markets feature a unique collection of pros and cons. For any aspiring forex trader, it's important to conduct adequate due diligence and decide if forex trading is suitable for you before you begin.

The pros of forex trading

  • High accessibility – Forex trades can be done from anywhere via an online platform. Signing up takes only a day or two, and the market is open 24 hours a day, five days a week. What's more, forex trading only really requires technical analysis of historical price moves, not the in-depth fundamentals and financial analysis required of shares traders.
  • Low capital requirements – If you want to start trading forex, the availability of leverage means you can start speculating with many times more than your initial margin.
  • Low operational costs – Trading forex typically means you'll be exposed to fewer fees and commissions compared to other types of investing.
  • Consistent depth and liquidity – Forex is the world's largest marketplace. This means that consistent depth and liquidity are all but assured, so you can trade whenever you want.
  • Diverse array of products – As a mature OTC market, there are plenty of different forex products you can choose from. This provides a great amount of strategic freedom.

The cons of forex trading

  • Need for discipline – Given the availability of enhanced leverage and abundance of trading options, forex traders' discipline is frequently tested. It's important to have the right mindset and attitude to risk so you don't get carried away.
  • Pricing volatility – Changes in pricing can be swift and dramatic, posing the risk of rapid, significant losses.
  • An ever-changing market – Past performance is not indicative of future results; forex trading is always changing, emphasizing the need for sound strategy and strong risk management.

Learn more about the pros and cons of forex trading.

How do you start trading forex?

If you've done your research and understand the fundamentals of trading forex, it's easy to start:

Step one: open an account
Open an account with a forex broker, inputting your personal details. It will take anywhere between one to three days to get fully set up and ready to trade.

Step two: pick a pair
Select a currency pair that you would like to trade: a major pair like EUR/USD or an exotic pair like JPY/SEK.

Step three: set your orders
Choose whether you wish to place stop or limit orders on your trade.

Step four: keep an eye on your position
Using trading tools, monitor the movement in your currency pair's price. In doing so, you can sell or buy at the correct time.

Step five: close your position
When the time is right, close your forex trade, and realising your profits or losses.

What are forex trading platforms?

The forex trading platform is the trader's window to the world's currency marketplace. To be effective, your trading platform must be up to the many challenges of the live forex market.

At FXCM, we offer a collection of capable and reliable forex trading platforms, each with unique features and functionalities.

Our flagship platform, Trading Station gives you everything you need to execute trades, perform in-depth technical analysis, and access your account wherever and whenever you need to.

We also support the industry-standard MetaTrader 4 (MT4) software and assorted speciality platforms. So, no matter what your approach to forex trading may be, rest assured that FXCM has your needs covered.

Explore our platforms

What are the most common ways to trade forex?

Unsure which strategies to use when learning how to trade forex? There are four main ways traders make money:

  • Day trading – Short-term day trading involves starting and completing a single position within a day. It's a straightforward way to trade, giving you lots of time and mental breadth to research and monitor a trade before closing your position in time. Read our guide to forex day trading.
  • Position trading – This long-term forex trade involves holding onto a pair for a prolonged period, waiting until it reaches a certain price level weeks or months into the future. It's great if you don't have plenty of time to spare or want to trade based on larger, long-term economic factors. Learn more about position trading.
  • Swing trading – A medium-term strategy, swing trading involves holding a pair for a few days and selling it when the price swings in a manner consistent with historical price charts and other forms of technical analysis. Find out more about swing trades.
  • Scalping – Scalping involves holding trades for a matter of minutes, profiting a small amount but highly frequently. This form of forex trading requires plenty of time, so suits traders who treat forex as their day job. Learn more about scalping.

What is forex trading best practice?

Unless you're playing the lottery, success isn't an accident. Mastering any discipline takes desire, dedication and skill. Becoming a successful forex trader is no different. To become an expert, there are some key best practices to follow:
Have a plan
The most common attribute among effective forex traders by far is that they have a plan. A trading plan is a structured approach to trade selection, trade management, and risk management. Without this, a trader is likely to flounder in live market conditions.

By incorporating a viable strategy to sound money management principles, a trading plan lets you consistently engage in forex, remove chance and generate statistically verifiable, repeatable results. So how does one build a successful forex trading plan? The answer lies in personal experience, technical analysis and input from market professionals.

Start small
If you're new to forex trading, it's best to start small. Trading lower leverage ensures you have enough capital to become experienced in the market. There's plenty of time to implement higher degrees of leverage once you gain competency and security in the marketplace.

Create objectives
Whenever you make a trade, understand at what price you want to execute your trade, and utilise stop-loss and limit orders to automate your loss prevention and profit taking.

Adopt the right mindset
While there is no exact science of profitable forex trading, establishing good habits regarding risk versus reward, leverage, and timing is a great way to enhance your performance.

In 2015, the team at FXCM conducted an in-depth study of client behaviour and identified three areas where winning traders excelled: cutting losses and letting profits run, using leverage properly, and trading at the right time of the day.

Discover the three traits of successful traders

Choose FXCM and become a forex trading expert

With FXCM, learn to trade forex and raise your trading IQ with expert courses, tutorials, blogs, guides, and expert webinars all readily accessible online 24/7/365. Then, use our trusted platforms to start your trading in the forex market.

Visit our online classroom or start trading with FXCM below. If you have any questions, be sure to visit our help and support hub or chat with a specialist today.

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Forex

Is Forex Profitable?

As the world's largest financial market, the forex attracts millions of participants from around the globe on a daily basis. The result is a highly liquid, diverse trading venue that…

Forex Trading For Beginners

The forex market is the largest capital marketplace in the world. Featuring more than $5 trillion in daily turnover, forex is a digital trading venue where speculators, investors and liquidity providers from around the world interact.

For those new to the global currency trade, it is important to build an educational foundation before jumping in with both feet. Understanding the basic points of forex trading is a critical aspect of getting up-to-speed as quickly as possible. It's imperative that you're able to read a quote, quantify leverage and place orders upon the market.

If you are interested in boosting your forex IQ, completing a multi-faceted forex training course is one way to get the job done. To learn more, check out our currency market primer to get on the same page as the forex pros.

Best Practices for Forex Trading

Unless you are playing the lottery, success isn't an accident. Mastering any discipline takes desire, dedication and aptitude. Becoming a winning forex trader is no different. Without the want, will and know-how, your journey into the marketplace is very likely doomed before it begins.

By far, the most common attribute among successful traders is that they have a plan. The trading plan is a structured approach to trade selection, trade management and risk management. Without a plan, a trader is likely to flounder in live market conditions.
Through incorporating a viable strategy to sound money management principles, one is able to consistently engage in forex. In doing so, chance is removed and statistically verifiable, repeatable results are generated. So how does one build a successful trading plan? The answer lies in personal experience and input from market professionals.

Fortunately, some of the differences between successful traders and those who lose money are no longer a secret. Through conducting an intense study of client behaviour, the team at FXCM has identified three areas where winning traders excel. While there is no "holy grail" for profitable forex trading, establishing good habits in regards to risk vs reward, leverage and timing is a great way to enhance your performance.

To learn how successful traders approach the forex, it helps to study their best practices and personal traits. Trading doesn't have to be a mystery—much of the work has already been done for you.

Free Online Forex Trading Courses

One of the advantages of being a modern forex trader is the availability of expert guidance. Internet connectivity and systems technology have brought an abundance of useful information to our fingertips. The only thing needed to raise your trading IQ is a desire to learn. Trading courses, tutorials, blogs, guides and expert webinars are all readily accessible online, 24/7/365.

A webinar is one of the best ways to learn information online. They offer an unparalleled personal learning experience in an exclusive one-on-one format. Attending a webinar is the next best thing to sharing a desk with a forex professional. If you are interested in watching an FX market professional at work, then attending a webinar is a must.

FXCM offers a variety of webinar types, each designed to cater to your trading needs. Daily entries cover the fundamental market drivers of the German, London and New York sessions. In addition, a library of past recordings and guest speakers are available to access at your leisure in FXCM's free, live online classroom.

Disclosure

Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.