Understanding the Foreign Exchange Market: A Comprehensive Guide for Beginners in Trading

The foreign exchange market represents a key meeting point for banks, institutions, and individual investors around the world. Whenever you convert a local currency to a foreign one while traveling or conduct a financial transaction in a different currency, you are directly participating in this massive market. However, traders also use it as an investment tool to benefit from ongoing exchange rate fluctuations. The forex trading market is the largest globally in terms of trading volume and liquidity, with an average daily trading volume reaching $9.6 trillion according to the latest statistics in April 2025. This volume far exceeds the combined total trading volumes of all global stock markets.

What is the Foreign Exchange Market?

The term “Forex” is short for foreign exchange, which is the place where currency exchange transactions occur around the clock between individuals, financial institutions, governments, and central banks worldwide.

Forex trading essentially involves buying one currency and selling another simultaneously, aiming to profit from changes in their exchange rates. When trading, you always deal with currency pairs like EUR/USD or USD/JPY, where the first currency is the “base currency” and the second is the “quote currency”. The quoted price reflects how many units of the quote currency are needed to buy one unit of the base currency.

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

Basic Information about the Forex Market:

• The largest market worldwide: Its size, liquidity, and activity rate are unmatched by any other market
• Continuous trading across pairs: Currencies are never traded alone but always against another currency
• Ongoing daily opportunities: Thanks to high liquidity and rapid changes, traders find daily opportunities to capitalize on market movements
• No fixed center: It does not rely on a single exchange but on a global network of electronically connected financial institutions
• Almost continuous operation: Opens five days a week, 24 hours a day, due to overlapping sessions in major financial centers: Sydney, Tokyo, London, and New York

How the Forex Market Works

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

Traders make decisions based on their expectations of each currency’s movement within the pair:

• Buying means expecting the base currency to appreciate against the quote currency
• Selling means expecting the base currency to depreciate against the quote currency

Since currency movements depend on the relationship between two currencies, the strength of one necessarily implies the weakness of the other, making the market based on continuous comparison.

Types of Currency Pairs

1- Major Pairs (Majors)

Include the most traded currencies globally, representing major economies, thus offering the highest liquidity and narrowest spreads:

• 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

The EUR/USD pair alone accounts for a very large percentage of total market trading.

2- Minor Pairs (Minors)

Also called cross pairs because they do not include the US Dollar. Although less active than majors, trading costs are higher due to wider spreads:

• 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

3- Exotic Pairs (Exotics)

Combine a strong currency with a currency from an emerging economy, characterized by higher volatility and wider spreads:

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

Basic Terms in Forex Trading

Spread: The difference between the bid and ask price of a currency. The smaller, the better for the trader. Example: If the bid is 1.1050 and the ask is 1.1048, the spread = 2 pips.

Lot: A unit of measurement that determines the size of the trade, divided into (standard, mini, micro) types to facilitate control and risk management. Example: A trade of 0.01 lots represents a small size suitable for beginners.

Pip: A unit measuring the change in the exchange rate of a currency pair, usually representing movement in the fourth decimal place. Example: EUR/USD moving from 1.1000 to 1.1001 means a 1 pip movement.

Leverage: A tool that allows increasing the size of the trade using a small part of the margin(margin), which increases potential profits but also doubles the risk of losses. Example: With a $100 deposit and 1:100 leverage, you can trade with $10,000.

Margin: A small amount of the trade’s value used as collateral to open positions, enabling larger trading volumes. Example: To open a $1,000 position, you might only need a $50 margin depending on leverage.

Market Hours and Trading Sessions

Forex is one of the few markets that operates almost continuously, opening 24 hours a day, five days a week. Trading begins with the Sydney session opening on Monday morning and continues until the New York session closes on Friday evening.

At 5:00 PM New York time, a rollover occurs(Rollover), where trading dates are automatically extended. The exception is for NZD pairs, which are rolled over at 7:00 AM Auckland time.

Best Trading Times: Market activity and liquidity are highest during overlapping main sessions, especially when London overlaps with New York, where trading volume increases and prices move faster. Conversely, activity tends to decrease during the Asian session, especially mid-session.

Economic and Political Factors Affecting Prices

The forex market is influenced by various factors that cause currency prices to fluctuate constantly. Understanding these factors helps traders better anticipate movements.

Central Bank Monetary Policies: Decisions to raise or lower interest rates directly impact currency value. Raising rates makes the currency more attractive to foreign investors. Example: In 2022, the US Federal Reserve repeatedly raised interest rates to combat inflation, causing the dollar to rise against the euro and yen.

Inflation and Economic Growth: Rising inflation reduces a currency’s purchasing power, while strong economic growth attracts investments and strengthens the currency. Example: When China announced a slowdown in growth in 2015, the People’s Bank of China unexpectedly devalued the yuan, affecting global markets.

Direct Government Intervention: Central banks sometimes intervene to support or devalue their currency. This happened during the Plaza Accord in 1985, where major countries cooperated to devalue the dollar against the yen and mark.

Political and Geopolitical Crises: Unstable political events push investors toward “safe-haven” currencies like the dollar and yen. Example: During the COVID-19 pandemic in 2020, investors flocked to the dollar and yen as safe havens, while emerging market currencies declined.

Trading Styles: Long-term vs. Short-term

The forex market offers various options depending on how long traders hold positions and their trading style.

Long-term Forex Trading

Based on holding positions for weeks, months, or even years, aiming to benefit from overall trends and fundamental economic factors. Primarily focuses on fundamental analysis: growth rates, interest rates, and central bank policies.

Example: If you observe that the US economy is steadily growing and the Federal Reserve indicates stable interest rates, you might open a buy position on the dollar and hold it long-term.

Advantages:

• Flexibility to monitor without constant screen time
• Focus on major trends rather than daily fluctuations
• Ample time for analysis and informed decision-making
• Less psychological pressure than short-term trading

Short-term Forex Trading

Focuses on daily or intraday price movements to achieve quick profits. Positions last from minutes to a few days, including strategies like day trading and scalping.

Example: Monitoring EUR/USD during the European session and taking advantage of small movements to open multiple trades within the day.

Advantages:

• Faster profit opportunities from daily volatility
• Flexible strategies based on market movements
• Ability to trade at any convenient time
• Exploiting rapid fluctuations
• Reducing overnight risk by closing positions daily

Advantages and Challenges of Forex Trading

###Advantages

✅ 24/7 Trading: The market operates 24 hours a day, five days a week, providing flexibility to trade anytime.

✅ Low Capital Requirements: Starting with a small capital is possible thanks to leverage and narrow spreads, with no high commissions.

✅ High Liquidity: Ability to execute large trades without significantly impacting prices, with tight spreads.

✅ Diverse Profit Opportunities: Benefit from both short-term and long-term movements.

Challenges

❌ High Risks: Possibility of losing all capital as prices are quickly affected by economic and political factors.

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

❌ Constant Volatility: Prices are always changing, offering opportunities but increasing the risk of significant losses.

❌ 24/7 Trade Management: The market’s continuous operation exposes trades to sudden changes during absence.

How to Start Trading Forex

1. Open a Trading Account: Choose a reliable broker with strong regulation, powerful analytical tools, and low fees.

2. Set Goals and Make a Plan: Define capital, trade size, currency pairs, and profit/loss targets.

3. Choose Currency Pairs: Focus on major pairs initially for higher liquidity.

4. Manage Risks: Set risk per trade (1-2% of capital), and use stop-loss orders.

5. Monitor Trades: Follow market movements using technical and fundamental analysis tools.

6. Evaluate Performance: After closing a trade, analyze results to improve future strategies.

7. Keep Learning: Forex is a dynamic market, so stay updated with economic news and technical analyses.

Effective Forex Trading Strategies

Scalping (Scalping): Opening and closing trades within minutes or seconds, with small profits per trade.

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

Swing Trading (Swing Trading): Holding trades for several days or weeks to benefit from medium-term trends.

Trend Following (Trend Following): Following the overall price movement and staying in the trade as long as the trend continues.

Essential Technical Indicators

• Moving Averages: To identify overall trend and reduce impact of daily fluctuations
• RSI (Relative Strength Index): To determine if the price is overbought or oversold
• MACD: To identify trend direction and potential reversals
• Bollinger Bands: To detect volatility levels and sudden movements
• Support and Resistance Levels: Price points where the market tends to pause or reverse

Golden Tips for Beginners

💡 Learn the market thoroughly before trading with real money

💡 Set a clear plan and stick to it in every trade

💡 Start with a demo account to practice strategies without real losses

💡 Manage risks carefully and use stop-loss orders

💡 Control your emotions and avoid letting greed or fear influence decisions

Summary

The forex market is the largest financial market worldwide, offering extensive opportunities for traders, individuals, and companies. Its high liquidity and continuous availability make it highly flexible for trading at any time. You can enter the market with a small capital, whether you are a beginner or a professional.

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 all elements that make the experience safer and more profitable.

Forex is not just a currency exchange market but an ongoing educational experience to understand the global economy and wisely capitalize on financial opportunities with discipline.