What Is Forex Trading and How It Works in 2026

What Is Forex Trading?

Forex trading, or what we call “foreign exchange” or “FX,” is where investors, traders, and institutions buy and sell currency pairs to benefit from the rate changes. The market is the most active globally, with trading volume of more than $6 trillion.

The Forex market is decentralized, unlike the stock market, which has a central location. The forex market is open 24 hours on business days and closes on weekends. 

How Does Forex Trading Work?

To trade Forex, it always involved with 2 currencies, which we call base and quote currencies, for example, EUR/JPY and GBP/USD. The 2 currency pairs will be traded against each other by buying one currency and selling another at the same time.

The traders and investors will gain profits or losses depending on how well they can predict the price direction. They only have two options to choose from: to go long or short positions. If the price moves in the direction of the predictions, you will make a profit; if it moves in the opposite direction, you will lose. 

Types of Currency Pairs: Major, Minor & Exotic

There are many different types of currency trading pairs for you to choose from. It always depends on your trading styles and trading strategies because different types of currency pairs move differently. The currency pairs include base and quote currencies, which means:

• The base currency is the first currency in forex currency pairs.

• The quote currency is the second currency in forex currency pairs.

Major Forex Currency Pairs

There are seven major forex currency pairs that have to be paired with USD, either as a base or quote currency, such as EUR/USD, GBP/USD, USD/JPY, and NZD/USD. Usually, the currency that is paired with a major currency always has more liquidity and high volatility.

Minor Forex Currency Pairs

The minor currency pairs do not include the USD as a base or quote currency. Mostly, they are paired with the currencies that are less traded against other currencies, such as EUR/GBP, CHF/JPY, AUD/JPY, or GBP/JPY. They have high volatility and less liquidity compared to major pairs.

Exotic Forex Currency Pairs  

The exotic forex usually pairs one major currency with another developing economy currency, such as USD/THB, EUR/ZAR, USD/SEK, or EUR/NOK. Usually, the currency pairs are not a popular option to trade in the market. It has high volatility and less liquidity, which causes a wider spread.

Basic Forex Trading Terms for Beginners

Let’s talk about the key concept of forex trading that beginners need to know. Once you know about the key concepts, you will understand more about how forex trading actually works.

• Bid is the price which you can sell a currency

• Ask is the price where you can buy a currency

• Pip is the percentage in points for most currencies, which is used to measure profits and losses

• A lot is the size of your trade; different lots show how much money you’ll earn or lose per percentage in points.

• Spread is the cost when you are entering a trade, either buy or sell; the difference between the prices is the fees you need to pay to the broker.

• Leverage can increase your profits with a small amount of money but at the same time can increase your losses too.

• Margin is the portion size of your own money balance that the broker will lock your money to keep your trade open.

When Is The Forex Market Open?

The Forex market opens 5 days a week and 24 hours a day. There are four major opening market sessions following main markets like Sydney, Tokyo, London, and New York.

If you are looking for the best time to trade, here are 4 of the best forex session times (UTC timezone):

• Sydney session starts at 9pm - 6am

• Tokyo session starts at 12am - 9am

• London session starts at 7am - 4pm

• New York session starts at 12pm - 9pm

What are the types of Forex markets?

There are four major types of forex markets that you can choose to trade, such as futures, spot, options, and forward, with more details below:

Spot market

The spot market is the most popular market for beginners to trade. You can trade currency pairs at the market price or the current price in a short time. It’s quite direct and less confusing for beginners.

Options market

The option market is a contract you need to make to trade the currency pairs at a specific price. You can choose by call options (buy) or put options (sell); both give you the right but not the obligation.

Futures market

An agreement to buy or sell at the fixed amount of a currency trade at the price you have set up on a future date. The  currency futures are usually traded on organized exchanges, and you need to always follow the price movements.

Forward market

It’s a private agreement that allows traders to buy or sell currency at the future price that you prefer; it’s more flexible than the futures market and is protected from currency fluctuations that will impact your price.

Basic  Forex Trading Strategies for Beginners

Before entering the market, beginners need to know the types of forex trading strategies that they can choose to trade based on these 6 main types; they include:

• Scalp trading is a short-term trading that usually takes around minutes or seconds to trade. These short trades usually have a limited profit because of the small positions.

• Swing trading is a type of trading that requires you to hold   longer, such as days or weeks. This is safer to trade since it requires more data on the market.

• Day trading is when you open a trade and close it within the same day; it usually lasts for a couple of hours or minutes.

• Position trading is when you open a trade and hold the trade for a long time, such as weeks, months, or even years.

• Trend trading is when you identify the market directions by using trend lines that will act as support and resistance for you.

• Breakout trading is when you are waiting for the price to break out of the range and predict whether you should enter buy or sell.

What are the Types of Forex Orders?

To trade forex, you need to know the types of forex orders to understand how it works. There are five order types you need to know, such as market orders, stop loss, limit orders, stop limit orders, trailing stop orders, and take profit orders.

• Market orders are the most straightforward order type, where you can buy and sell at the best price right away.

• Limit orders are where you can buy or sell at the price you want.

• Stop-loss orders are used when you want to close the trade; you can set it to the price level you would like to execute it at, and it will automatically close it for you.

• Take profit orders are used when you want to close the trade to get your profits once it reaches your profit target. If you set up the take profit order levels, then the position will be automatically closed at the level.

• A stop-limit order is a tool that combines a stop order and a limit order. You can set this at a certain price; once the price level is hit, then it will turn into a limit order to buy or sell.

• A trailing stop helps you lock the profits while you can still follow the market price at a set distance

What Are The Risks of Forex Trading?

Forex trading is one of the markets that has high volatility, which creates higher risks like other markets.   Understanding the technical analysis part, you need to understand the risks that impact the forex market to protect your money as well.

Forex Market volatility

The Forex market moves,   and sometimes the prices change rapidly within minutes or seconds. Short-term traders or high-leverage traders need to be aware that price moves during high volatility can lead you to big losses.

High Leverage Risk

High leverage can increase profits, but it can also increase losses. This is a common mistake for beginners who want to make quick money but end up losing it. Understanding leverage and how to manage risk will protect your account balance in the long term.

Major news and Political Factors

The Forex market is moved by global economic news, geopolitical events, and interest rate announcements. This can create big moves in the market, which makes it harder to predict the price moves when major news is released.

How Do I Start With Forex Trading?

If you are now ready to trade forex but don't know how to get started. You can consider the following steps below:

1. Choose a broker that is regulated legally, like XS.com

2. Deposit funds that you can risk

3. Download trading platforms such as MetaTrader 4 and MetaTrader 5

4. Practice with a Demo account first

5. Build up your trading plan, follow the news and review traders

6. Until you’re confident with your trades, then you can start trading

Pros and Cons of Forex Trading

Trading Forex has advantages and disadvantages that you need to consider:

Conclusion

Forex trading is where we trade currency pairs to gain profits from exchange rate fluctuations. It offers opportunities for investors and big institutions to manage currency based on price movements while it provides benefits like liquidity and profit potential.

Also, the forex market comes with risks like high volatility that can lead to big losses. If you want to increase winning rates trading forex, you need to be patient, manage your own risk, and follow your trading strategies without emotions.