FOREX Market: Complete Trading Guide

What is FOREX

FOREX (Foreign Exchange Market) represents the global decentralized currency exchange market. Daily trading volume exceeds seven trillion dollars, making it the largest financial market worldwide. Trading operates around the clock from Monday through Friday via electronic platforms connecting participants across all time zones. Before proceeding, please read: how to trade Forex.

Unlike stock exchanges, FOREX has no single physical location. Transactions occur directly between participants through interbank networks and broker platforms. This structure ensures continuous trading and high liquidity — the ability to instantly execute orders of any size at market prices without significant slippage.

Accessibility makes FOREX attractive to diverse participants. Central banks regulate national currencies through monetary policy decisions. Corporations convert international revenue streams. Hedge funds speculate on macroeconomic trends using sophisticated strategies. Retail traders seek profits from short-term price fluctuations. Each group contributes to currency rate formation.

Currency Pairs and Quotes

A currency pair serves as the basic trading instrument on FOREX. It shows the value ratio between two currencies: base and quote. In EUR/USD, the euro acts as base currency, the dollar as quote. A quotation of one point ten means one euro costs one dollar and ten cents.

Currency pairs divide into categories based on liquidity. Major pairs include the US dollar: EUR/USD, GBP/USD, USD/JPY, USD/CHF. They offer maximum liquidity and minimum spreads. Cross rates exclude the dollar: EUR/GBP, AUD/JPY. Exotic pairs combine major currencies with emerging market currencies.

Quotes contain two prices: bid — the price at which you can sell base currency, ask — the purchase price. The difference constitutes the spread, representing broker revenue. On major pairs during active hours, spreads may reach one to two pips.

Market Participants

Central banks occupy the hierarchy's apex as the most influential players. The Federal Reserve, European Central Bank, and Bank of Japan shape monetary policy affecting national currency rates. Interest rate changes, quantitative easing programs, and currency interventions create powerful market movements.

Commercial banks provide interbank market liquidity. Major players — JPMorgan Chase, Deutsche Bank, Citibank — conduct billions of dollars in daily transactions. They execute client orders and engage in proprietary speculative trading using informational and technological advantages.

Hedge funds and institutional investors apply sophisticated strategies for profit extraction. They analyze macroeconomic data, build fair value models, and open large directional positions. Their actions can amplify trends or trigger reversals.

Retail traders gained market access through internet development. Modern technology enables trading with minimal capital using leverage. The retail segment accounts for approximately ten to fifteen percent of total turnover.

Trading Sessions

The Asian session opens at midnight GMT with Tokyo trading beginning. Singapore, Hong Kong, and Sydney join the activity. Pairs involving yen, Australian and New Zealand dollars show elevated activity. Volatility remains moderate, suitable for range trading strategies.

The European session starts at seven AM GMT with Frankfurt and London opening. This represents the most active period: London accounts for approximately forty percent of worldwide turnover. EUR/USD and GBP/USD pairs show significant movements.

The American session begins at noon GMT. Overlap with European creates peak activity. US economic data releases generate sharp impulses. Dollar pairs demonstrate maximum volatility during this period.

Trading Mechanics

Trade volume measures in lots. A standard lot equals one hundred thousand base currency units. Mini-lots comprise ten thousand units, micro-lots one thousand. Retail brokers offer fractional lots, enabling trading with minimal capital. I also recommend studying currencies and quotes for a complete picture.

Leverage allows controlling positions exceeding deposit size. One hundred to one leverage means one thousand dollars can open a one hundred thousand dollar position. Margin equals one percent of trade volume at such leverage.

Overnight position carrying incurs swap charges or credits based on interest rate differential between pair currencies. Positive swaps when buying high-yield currencies enable carry trading strategies.

Price Movement Factors

Central bank monetary policy exerts fundamental influence on currency values. Interest rate increases strengthen currencies by attracting yield-seeking capital from global investors. Policy easing through rate cuts or quantitative easing conversely weakens exchange rates. Markets closely monitor central banker statements and meeting minutes for hints about future policy decisions.

Macroeconomic data shapes expectations regarding economic trajectory and relative currency strength. GDP growth, inflation readings, and employment figures are compared against analyst forecasts. Results exceeding expectations typically strengthen domestic currency; disappointments weaken it. Economic calendars help traders track upcoming releases.

Geopolitical events create sharp fluctuations that can temporarily override fundamental factors. Elections, trade negotiations, military conflicts, and international sanctions affect risk perception and capital flows between regions. Safe-haven currencies — dollar, yen, Swiss franc — strengthen during periods of global uncertainty as investors seek protection.

Technical factors also play important role. Support and resistance levels, trendlines, and chart patterns influence trader behavior and short-term price movements. Combining fundamental and technical analysis improves forecast accuracy for both entry and exit decisions.

Choosing a Broker

Regulation ensures client fund protection. Authoritative regulators — FCA (UK), CySEC (Cyprus), ASIC (Australia) — establish standards for fund segregation, capital requirements, and transparency. Working with unregulated brokers carries deposit loss risk.

Trading conditions determine strategy effectiveness. Spreads, commissions, execution speed, and available leverage vary between brokers. Scalpers require minimal spreads; longer-term traders prioritize reliability and low swaps.

Platform should match your needs. MetaTrader remains industry standard with extensive functionality and automated trading support. Alternatives like cTrader and TradingView offer improved visualization and additional analysis tools.

Risk Management

Stop-losses limit losses on each trade by automatically closing positions at predetermined price levels. Protective order placement is mandatory before position opening. Professionals risk no more than one to two percent of account per trade, enabling survival through losing streaks.

Position sizing connects acceptable risk with trade parameters. The formula considers allowable loss in deposit currency, distance to stop-loss in pips, and pip value for selected volume. Proper calculation prevents exceeding planned risk.

Diversification reduces dependence on single instruments. Trading multiple pairs with low correlation distributes risk. Psychological discipline reinforces risk management by preventing emotional decisions that undermine planning.

Trading Strategies

Trend trading involves opening positions in dominant market movement direction. Traders identify trends using moving averages or ADX indicator and hold positions until reversal signals appear. Currency trends can persist for weeks and months.

Scalping focuses on extracting profit from minimal price movements. Scalpers execute dozens of trades daily, holding positions from seconds to minutes. The strategy requires low spreads and fast execution.

Swing trading occupies middle ground between intraday and long-term approaches. Positions are held from several days to weeks to capture medium-term swings.

News trading exploits volatility after economic data releases. Employment reports, inflation readings, and rate decisions can move markets hundreds of pips within minutes.

Conclusion

FOREX offers unique opportunities for traders of all levels. High liquidity, round-the-clock accessibility, and instrument diversity make the market attractive for speculation and investment. Leverage amplifies profit potential while proportionally increasing risks.

Success requires systematic approach. Understanding market structure, trading mechanics, and rate movement factors forms the analytical foundation. Choosing reliable broker and implementing strict risk management protect capital. To consolidate the material, also study the Trading Basics.

Beginning traders should master demo accounts, test various strategies, and develop personal trading styles. Transition to live trading should occur with minimal capital and strict adherence to risk management rules. The currency market rewards patience, discipline, and continuous improvement.

Frequently Asked Questions