Forex Market: A Comprehensive Guide to Understanding Currency Exchange Mechanisms and Investing in Them

What is Forex and How Did This Market Come About?

The forex market, or what is known as the foreign exchange market, represents a global meeting point where banks, companies, investors, and individuals interact to exchange currencies around the clock. Every time you convert your local currency before traveling or pay for a service with a different currency, you are actively participating in this massive market. While most people deal with currencies for practical purposes like travel and trade, traders focus on exploiting exchange rate fluctuations to make profits.

Forex is considered the largest financial market worldwide in terms of trading volume and liquidity. The average daily trading volume reached $9.6 trillion according to the latest statistics in April 2025, a figure that far exceeds the total trading volumes of global stock markets. This is due to the global nature of currencies and the reliance of the international economy on continuous exchange.

How Does the Forex Market Actually Work?

Forex operates differently from stock and commodity markets; there is no central exchange that gathers traders. Instead, transactions occur over a global network of banks and financial institutions connected electronically, known as over-the-counter (OTC).

When trading forex, you always deal with a currency pair such as EUR/USD or USD/JPY. The first currency is the base currency, while the second is the quote currency. The displayed price shows how much of the quote currency you need to buy one unit of the base currency.

Trading decisions depend on expectations of currency movements:

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

Since currency movements are based on the relationship between two currencies, an increase in one necessarily indicates a weakening of the other in the pair.

Types of Major Currency Pairs

The forex market is divided into three categories of pairs:

Major Pairs (Majors)
Include the most traded currencies globally and represent strong economies. They feature the highest liquidity and narrowest spreads:

• EUR/USD – Euro versus US Dollar
• USD/JPY – US Dollar versus Yen
• GBP/USD – British Pound versus US Dollar
• USD/CHF – US Dollar versus Swiss Franc

Minor Pairs (Minors)
Do not include the US Dollar and have less activity than major pairs, with wider spreads:

• EUR/GBP – Euro versus Pound
• GBP/JPY – Pound versus Yen

Exotic Pairs (Exotics)
Combine a strong currency with one from an emerging economy. They tend to be more volatile with wider spreads:

• USD/MXN – US Dollar versus Mexican Peso
• USD/THB – US Dollar versus Thai Baht

Essential Terms You Should Know

Spread: The difference between the bid and ask price. The smaller, the better. Example: If the bid is 1.1050 and the ask is 1.1048, then the spread = 2 pips.

Lot: A unit of trading volume, divided into standard, mini, and micro lots to facilitate trade size management.

Pip: The smallest price change in a currency, usually representing the fourth decimal place.

Leverage: A tool that allows increasing the size of a trade with a small amount of capital (margin). It amplifies both profits and losses.

Margin: A small amount used as collateral to open a leveraged position, enabling larger trade sizes.

Market Hours and Main Sessions

Forex operates 24 hours a day, five days a week. It begins with the Sydney session on Monday morning and continues until the New York session closes on Friday evening. The sessions follow in sequence:

• Sydney
• Tokyo
• London
• New York

The best trading times are during overlaps of main sessions, especially the London-New York overlap, where activity and liquidity increase significantly.

Factors Influencing Currency Price Movements

Monetary Policies of Central Banks
Interest rate decisions and quantitative easing directly impact currency value. Raising interest rates makes a currency more attractive to foreign investors. When the US Federal Reserve raised rates in 2022, the dollar appreciated against most major currencies.

Inflation and Economic Growth
High inflation reduces a currency’s purchasing power, while strong economic growth attracts investments and strengthens the currency.

Political and Geopolitical Events
Political instability drives investors toward “safe-haven” currencies like the dollar and yen. Forex experienced sharp volatility during the COVID-19 pandemic in March 2020 when investors flocked to safe assets.

Different Trading Strategies

Scalping (Scalping)
Opening and closing trades within minutes or seconds for small profits, benefiting from short-term fluctuations.

Day Trading (Day Trading)
Opening and closing trades within the same day, targeting short-term volatility and avoiding overnight risk.

Swing Trading (Swing Trading)
Holding trades for several days or weeks to capitalize on medium-term trends, offering larger profit opportunities.

Trend Following (Trend Following)
Following the overall price movement using indicators like moving averages to identify and stay in a trend.

The Real Advantages of Forex Trading

✓ 24/7 Trading: Complete flexibility to choose trading times according to your schedule.

✓ Low Capital Requirements: Start with a small capital thanks to leverage and tight spreads.

✓ Very High Liquidity: The most liquid market globally, making it easy to execute large trades without noticeable price impact.

✓ Various Opportunities: Profit from both short-term and long-term movements depending on your strategy.

Challenges Facing Traders

✗ Very High Risks: The possibility of losing all capital due to rapid volatility.

✗ Steep Learning Curve: Requires advanced knowledge of technical and fundamental analysis.

✗ Continuous Volatility: Prices move quickly, increasing the risk of significant losses.

✗ Constant Monitoring: The market runs 24 hours, which may expose trades to unexpected movements during your absence.

Practical Steps to Get Started

1. Learn the Basics Thoroughly
Study currency pairs and influencing factors before starting actual trading.

2. Set a Clear Plan
Define your capital, trade size, pairs to trade, and your goals.

3. Start with a Demo Account
Most brokers offer demo accounts funded with virtual money to practice trading without risk.

4. Choose Currency Pairs
Begin with major pairs that offer high liquidity and narrow spreads.

5. Manage Risks Wisely
Always set risk per trade (1-2% of capital), and use stop-loss orders.

6. Regularly Monitor Markets
Use technical and fundamental analysis tools to understand market movements.

7. Constantly Evaluate and Improve
After each trade, analyze what worked and what didn’t to develop your skills.

Basic Technical Indicators

• Moving Averages: Help identify overall trend and reduce daily volatility effects.

• Relative Strength Index (RSI): Reveals if the price is overbought or oversold.

• MACD Indicator: Shows trend direction and helps anticipate potential reversals.

• Bollinger Bands: Detect volatility levels and help forecast sudden movements.

• Support and Resistance Levels: Critical prices where the market may pause or reverse.

Golden Tips for Beginners

💡 Don’t rush into the market; patience in learning is better than quick losses.

💡 Control your emotions; fear and greed are enemies of a good trader.

💡 Never risk your entire capital on a single trade.

💡 Regularly follow economic news, as economic surprises move markets.

💡 Test your strategies on a demo account before trading with real money.

Summary

The forex market offers a real opportunity for investors and traders of all levels. With high liquidity, 24/7 availability, and diverse opportunities, it attracts many participants. However, success requires continuous education, strict risk management, and adherence to a clear plan.

Whether aiming for short-term profits or building a long-term investment, deep market understanding and disciplined execution are the keys to true success in the world of currency exchange.