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Forex trading involves the global exchange of currencies and is the largest, most actively traded financial market. Unlike the stock market, it operates 24 hours a day, five and a half days a week, allowing traders around the world to engage at nearly any time.
In this lesson, you’ll learn how the forex market functions, the different types of currency pairs, and what sets it apart from other markets.
Forex (short for foreign exchange) trading is the process of exchanging one currency for another at an agreed price, hoping to make a profit.
Unlike stock trading, which happens on centralized exchanges, forex trading is decentralized, meaning there’s no single location where all trades take place.
Instead, forex transactions happen online between traders, banks, and financial institutions.
Example: Imagine you’re traveling to Europe from the U.S. You exchange $1,000 for Euros at a rate of 1 USD = 0.92 EUR. If the exchange rate later moves to 1 USD = 0.95 EUR, and you convert your money back to dollars, you’d end up with more than your original $1,000—making a profit on the exchange.
Key Features of the Forex Market:
The most liquid market in the world.
Trades 24 hours a day, 5.5 days a week.
Completely online and decentralized.
Accessible to anyone with an internet connection.
Daily trading volume exceeds $5 trillion.
Forex trading always involves a pair of currencies. You’re buying one currency while selling another.
Examples of Forex Pairs:
EUR/USD: Euro vs. U.S. Dollar
USD/JPY: U.S. Dollar vs. Japanese Yen
GBP/USD: British Pound vs. U.S. Dollar
Each currency pair consists of two parts:
Base currency (first currency): The currency you are buying.
Quote currency (second currency): The currency you are selling.
For example, in EUR/USD = 1.10, it means 1 Euro = 1.10 U.S. Dollars. If the price rises to 1.15, it means the Euro has strengthened against the Dollar.
Not all currency pairs are the same. They are categorized into three main types:
A major currency trading pair contains the US Dollar (USD) and one of the other major global currencies.
The characteristics of these pairs are high liquidity, notable trading volumes, and less volatility than other pairs in the forex market.
The major pairs include:
EUR/USD (Euro/US Dollar)
USD/JPY (US Dollar/Japanese Yen)
GBP/USD (British Pound/US Dollar)
USD/CHF (US Dollar/Swiss Franc)
A minor currency pair doesn’t contain the US Dollar (USD) but contains other major currencies.
They’re also referred to as “cross pairs”. Even though they are less liquid than major pairs, minor currency pairs play a massive role in the forex market and are highly tradable.
The minor currency pairs include:
EUR/GBP (Euro/British Pound)
EUR/AUD (Euro/Australian Dollar)
GBP/JPY (British Pound/Japanese Yen)
AUD/JPY (Australian Dollar/Japanese Yen)
Exotic currency pairs include one major currency and one currency from an emerging market economy. These pairs are less liquid and more volatile than major and minor currency pairs.
The exotic currency pairs include:
USD/TRY (US Dollar/Turkish Lira)
EUR/TRY (Euro/Turkish Lira)
USD/SEK (US Dollar/Swedish Krona)
USD/SGD (US Dollar/Singapore Dollar)
Every forex pair has two currencies:
The base currency is the first one in the pair.
The quote currency is the second one in the pair.
Example: In EUR/USD, the Euro (EUR) is the base currency, and the U.S. Dollar (USD) is the quote currency.
The exchange rate tells you how much of the quote currency is needed to buy 1 unit of the base currency.
If EUR/USD = 1.10, it means 1 Euro = 1.10 U.S. Dollars.
If USD/EUR = 0.92, it means 1 U.S. Dollar = 0.92 Euros.
Example Calculation: If you want to buy 100 U.S. Dollars and the exchange rate is 0.92, you would need 92 Euros (100 × 0.92 = 92 EUR).
A pip (short for "percentage in point") is the smallest price movement in a currency pair. It’s usually the fourth decimal place in a price quote.
Example: If EUR/USD moves from 1.1000 to 1.1001, it has increased by 1 pip. ✔ The exception is currency pairs with the Japanese Yen (JPY), where a pip is the second decimal place.
A lot is a standard unit size for forex trades. Instead of buying one currency at a time, traders buy in "lots."
Standard Lot: 100,000 units of currency.
Mini Lot: 10,000 units.
Micro Lot: 1,000 units.
Example: If you trade 1 standard lot of EUR/USD, you're buying 100,000 Euros.
Getting started with forex trading is simple, but success requires strategy and discipline. Here’s how it works:
First, you need to choose a broker. A reliable, regulated broker will give you access to the forex market and the tools needed to trade.
Next, open a trading account by providing personal details and verifying your identity. This ensures security and compliance with financial regulations.
Download a trading platform: Most brokers offer MetaTrader 4 (MT4) or MetaTrader 5 (MT5) to analyze charts and place trades.
Use a demo account: Practice trading with virtual funds before risking real money.
Develop a trading plan: Define your goals, risk tolerance, and preferred strategies.
Once you’re ready, fund your account using a payment method offered by your broker. It’s best to start with an amount you can afford to lose.
Forex trading involves exchanging currencies online to profit from price movements.
The forex market is the largest financial market, operating 24/5.5 and completely decentralized.
Currency pairs consist of a base and quote currency, with different types like majors, minors, and exotics.
Key forex concepts include pips, lots, leverage, and spreads.
To start trading, choose a broker, open an account, practice on a demo, and develop a solid strategy.
Now that you have a solid understanding of forex trading, we’ll move on to commodity trading in the next lesson.
Our easy-to-use glossary breaks down complex trading terms into plain English. Learn the key terms every trader needs to know.
Explore our latest blog posts for trading tips, market insights,and real-world strategies. The XS blog keeps you informed, inspired, and ready to trade.
