Forex Market: A Comprehensive Guide to Understanding Foreign Exchange Trading

Introduction to Forex

The foreign exchange market represents the largest global financial arena in terms of transaction volume and activity. Banks, corporations, investors, and individuals come together to exchange currencies worldwide. Every money transfer you make before traveling or paying for a service in a foreign currency is considered an active participation in this massive, never-stopping market.

Recent data indicates that the average daily trading volume in the forex market reached $9.6 trillion according to April 2025 statistics, vastly surpassing the combined trading volume of global stock markets. This enormous size reflects the global nature of currencies and the international economy’s reliance on continuous and increasing exchange operations.

Forex trading offers numerous opportunities for speculation and investment by buying one currency against selling another to benefit from ongoing price movements. However, despite its great opportunities, this market carries significant risks due to leverage use and rapid price fluctuations, and may not be suitable for all traders.

What is Forex Trading?

The word “Forex” is an abbreviation of the foreign exchange term, which is the market where currencies are bought and sold continuously among individuals, banks, companies, and governments worldwide. It involves buying one currency against selling another at the same moment to profit from exchange rate differences.

When trading in this market, you always deal with a currency pair, such as EUR/USD or USD/JPY. The first currency is called the “Base Currency”, and the second is the “Quote Currency”. The displayed price shows how much of the quote currency is needed to buy one unit of the base currency.

The forex market leads all financial markets in trading volume, with transactions exceeding several trillions of dollars daily, making it a highly liquid and very fast-moving market. While some currency exchanges are for trade or travel purposes, the majority stem from traders seeking quick profits from rapid changes.

This market operates through a global electronic network without a central exchange, open 24 hours a day, 5 days a week. Currency movements are influenced by various economic and political factors such as interest rates, growth rates, inflation levels, and geopolitical stability.

Basic Facts About the Market

• Enormous Size Beyond Comparison: It is considered the largest worldwide in liquidity and activity, with no other market comparable.

• Participate Without Realizing: Any currency transfer during travel or payment in a different currency directly involves participation.

• Trade Only in Pairs: Currencies are never bought or sold alone, always against another currency. For example, EUR/USD means evaluating the euro against the US dollar.

• Continuous Daily Opportunities: Thanks to high liquidity and rapid changes, traders find daily opportunities for profit, especially in short-term strategies.

• No Centralized Venue: It does not operate through a single exchange like stock markets but via a global network of institutions trading electronically among themselves.

• Constant Activity: It opens 5 days a week, 24 hours a day, thanks to overlapping sessions among major financial centers: Sydney, Tokyo, London, New York, ensuring uninterrupted trading.

How the Forex Market Works

Forex operates differently from stock and commodity markets, as there is no central exchange gathering traders. Instead, trading occurs through a global network of banks and financial institutions communicating electronically, known as OTC(Over-The-Counter).

Using Standardized Symbols: International currency codes from ISO, such as USD for US dollar, JPY for Japanese yen, EUR for euro, are used to facilitate reading and trading.

Traders make decisions based on their expectations of currency movements:

• Buying means expecting the base currency to rise against the quote currency.
• Selling means expecting the base currency to fall against the quote.

Since currency movements always depend on the relationship between two currencies, an increase in one implies a decrease in the other, making the market based on continuous comparison of strength and weakness.

Major banks and institutions historically dominated most trading, but today the market is more open, allowing individual traders to participate via brokerage firms and benefit from rapid changes to make profits.

Currency Pair Classifications

Pairs are divided into three main categories, differing in trading volume, liquidity, and risk:

Major Pairs (Majors)

Include the most traded currencies globally, representing strong economies, thus enjoying high liquidity, narrow spreads, and accounting for most daily trading.

Famous Major Pairs:

• 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

EUR/USD alone accounts for a large percentage of total trading.

Minor Pairs (Minors)

Also called cross pairs, as they do not include the US dollar. Less active than majors but still popular, with higher trading costs due to wider spreads.

Famous Examples:

• EUR/GBP – Euro vs. British Pound
• EUR/CHF – Euro vs. Swiss Franc
• GBP/JPY – British Pound vs. Japanese Yen
• CAD/JPY – Canadian Dollar vs. Japanese Yen
• EUR/NZD – Euro vs. New Zealand Dollar

Exotic Pairs (Exotics)

Combine a strong currency with a currency from emerging or less traded countries. Characterized by higher volatility and wider spreads, suitable for experienced traders willing to take greater risks.

Known Exotic Pairs:

• USD/MXN – US Dollar vs. Mexican Peso
• USD/THB – US Dollar vs. Thai Baht
• GBP/PLN – British Pound vs. Polish Zloty
• EUR/RUB – Euro vs. Russian Ruble

Basic Terms

Spread: The difference between the bid and ask price. The smaller, the better for traders. For example, if the bid is 1.1050 and the ask is 1.1048, the spread = 2 pips.

Lot: A measurement unit that determines the size of the trade, divided into types(Standard, Mini, Micro) for easier control. A 0.01 lot size means a small trade suitable for beginners.

Pip: A unit measuring price change, usually representing movement in the fourth decimal place. Moving EUR/USD from 1.1000 to 1.1001 = 1 pip.

Leverage: A tool that amplifies trade size using a small margin(Margin), multiplying profits and losses. Depositing $100 with 1:100 leverage allows trading with $10,000.

Margin: The amount used as collateral to open leveraged trades. Opening a $1,000 trade may require only $50 margin.

Trading Hours and Sessions

The market operates almost nonstop, 24 hours daily, 5 days a week. Trading begins with the Sydney session on Monday morning and continues until the New York session closes on Friday evening.

Main sessions in chronological order:

• Sydney: 22:00 GMT
• Tokyo: 00:00 GMT
• London: 08:00 GMT
• New York: 13:00 GMT

Best Trading Times: Liquidity and activity increase during overlapping sessions, especially London and New York overlap, where trading volume rises and prices move quickly. The start of the London session is also a good time.

Conversely, the Asian session, especially mid-session, experiences relatively lower activity.

Rollover operations(Rollover) occur at 5:00 PM New York time(Exception: New Zealand dollar pairs at 7:00 AM Auckland time).

Factors Affecting Currency Prices

Central Bank Monetary Policies

Central bank decisions on interest rates directly impact currency value. Raising rates makes the currency more attractive to investors, while lowering them reduces demand. In 2022, the US Federal Reserve raised rates multiple times to combat inflation, causing the dollar to rise against the euro and yen.

Inflation and Economic Growth

High inflation reduces the currency’s purchasing power, while strong economic growth attracts investments and strengthens it. In 2015, China announced economic slowdown and unexpectedly devalued the yuan, affecting global markets.

Direct Government Intervention

Central banks sometimes intervene directly to support or devalue their currency. In the Plaza Accord of 1985, the US, Japan, Germany, France, and the UK cooperated successfully to lower the dollar against the yen and mark.

Political and Geopolitical Events

Political crises and international tensions drive investors toward “safe havens” like the dollar and yen. During the COVID-19 pandemic in March 2020, markets experienced sharp volatility, with investors flocking to the dollar and yen while emerging market currencies declined.

Common Trading Strategies

Long-term Trading

Relies on holding positions for weeks, months, or years to benefit from overall trends and fundamental factors. Focuses on fundamental analysis (growth rates, interest rates, central bank policies) with limited technical analysis.

Example: If you observe the US economy is strong and the Federal Reserve is stable, you might open a long-term buy position on the dollar against a weak currency.

Advantages:

• Flexibility in monitoring, no need for constant screen time
• Focus on major trends reduces daily fluctuation worries
• Ample time for analysis and decision-making
• Develops patience and financial discipline
• Less psychological pressure compared to fast-paced methods

Short-term Trading

Focuses on daily or intraday price movements for quick profits. Trades last minutes to days using strategies like scalping (Scalping) and day trading (Day Trading).

Example: Monitoring EUR/USD during the European session, exploiting small movements to open multiple quick-profit trades.

Requires continuous monitoring and intensive use of technical analysis (Indicators, charts).

Advantages:

• Faster profit opportunities from daily volatility
• Flexible strategies (Scalping, Day Trading, Swing Trading)
• 24-hour market, trade at your convenience
• Exploit rapid price movements
• Daily closing of positions reduces sudden event risks

Pros and Cons

Advantages

✅ 24/5 Trading: The market is open long hours, offering flexibility to trade anytime.

✅ Low Capital: Starting with relatively small amounts is possible thanks to leverage and narrow spreads.

✅ High Liquidity: Large trades can be executed without significant price impact, spreads are tight, and manipulation is minimal.

✅ Diverse Profit Opportunities: Continuous fluctuations allow for short-term and long-term gains.

Disadvantages

❌ High Risks: Possibility of losing all capital due to rapid volatility and unexpected economic factors.

❌ Learning Curve: Requires advanced knowledge of technical and fundamental analysis and risk management.

❌ Constant Price Fluctuations: Offers opportunities but increases the risk of significant losses.

❌ 24-Hour Management: The market is always open, trades are subject to price changes at any time, losses can occur during absence.

Popular Strategies

1. Scalping: Opening and closing trades within minutes or seconds, earning small profits from specific points.

2. Day Trading: Opening and closing trades within the same day, targeting short-term fluctuations.

3. Swing Trading: Holding positions for days or weeks, benefiting from medium-term trends, with relatively larger profits.

4. Trend Following: Following the overall trend, buying during uptrends and selling during downtrends, using indicators like moving averages.

Important Technical Indicators

• Moving Averages: Show overall trend and reduce daily fluctuation effects.
• RSI (Relative Strength Index): Reveals if the price is overbought or oversold.
• MACD: Shows trend direction and helps anticipate reversals.
• Bollinger Bands: Indicate volatility extent and potential price breakouts.
• Support and Resistance Levels: Specific prices where the market pauses or reverses, useful for identifying buy and sell points.

Tips for Beginners

💡 Deepen Market Knowledge: Study currency pairs and influencing factors before risking your capital.

💡 Set a Clear Plan: Define your goals, risk level, strategy, and stick to it.

💡 Use a Demo Account: Test your strategies with virtual funds before real trading.

💡 Manage Risks Wisely: Set risk percentages per trade, use stop-loss orders.

💡 Control Emotions: Don’t let losses or greed dominate; stick to your plan.

💡 Continuous Learning: Regularly follow economic news, analyses, and research.

Summary

The forex market is the largest global financial arena, enabling traders, companies, and banks to exchange currencies and profit from price changes. It features high liquidity, operates 24 hours, 5 days a week, offering great flexibility. Everyone can participate, from beginners with small capital to professionals with advanced tools.

Success in forex trading depends on continuous learning, developing analytical skills, and emotional control. Whether aiming for short-term profits or long-term investment, understanding the market, proper planning, and using the right tools are essential.

Ultimately, forex is not just a currency exchange market but an ongoing school for understanding the global economy and extracting financial opportunities wisely and disciplined.