What is Forex.. A comprehensive explanation of the foreign exchange market and how to invest in it

The foreign exchange market, or Forex, represents a global meeting point where banks, companies, investors, and individuals exchange currencies around the world. Every time you convert your currency before traveling or pay for a service with a different currency, you are directly participating in this massive, nonstop market. Although many deal with currencies for travel or business purposes, trading specialists use this market to benefit from the continuous fluctuations in exchange rates. The Forex market is classified as the largest financial market worldwide in terms of trading volume and liquidity, with an average daily trading volume of $9.6 trillion according to the latest statistics recorded in April 2025. This volume far exceeds the combined trading in global stock markets.

Understanding the Basics of the Forex Market

The word “Forex” is an abbreviation for the term Foreign Exchange, which is the market where currencies are continuously traded among individuals, banks, companies, and governments worldwide. Forex trading involves buying one currency while simultaneously selling another, aiming to profit from changes in their exchange rates.

When dealing with Forex, you always work with currency pairs such as EUR/USD or USD/JPY. The first currency is called the “base currency”, while the second is the “quote currency”. The displayed price reflects how many units of the quote currency are needed to buy one unit of the base currency.

The Forex market is decentralized, operating through a global electronic network without a central exchange. It operates 24 hours a day, five days a week, with currency movements influenced by various economic and political factors such as interest rates, economic growth, inflation, and geopolitical stability.

Quick Facts About the Forex Market

• The largest in the world: Forex ranks first globally in size, liquidity, and trading activity, and cannot be compared to any other market.

• 24/5 trading: The market opens five days a week and operates around the clock thanks to the succession of trading sessions in major financial centers—Sydney, Tokyo, London, and New York—ensuring continuous activity.

• Trading always in pairs: Currency is never bought or sold alone but always against another currency.

• Multiple and ongoing opportunities: Thanks to high liquidity and rapid price changes, traders find daily opportunities to profit from market movements, especially in short-term strategies.

• A global network without a single center: Forex does not operate through one exchange but relies on a worldwide network of banks and institutions trading via connected electronic systems.

How the Forex Market Works

The Forex market functions differently from stock markets, as there is no central exchange bringing traders together in one place. Instead, trading occurs through a global network of banks and financial institutions communicating electronically, known as over-the-counter (OTC) trading.

Traders make decisions based on their expectations of currency movements:

• Buying a pair means expecting the base currency to rise against the quote currency.
• Selling a pair means expecting the base currency to fall against the quote currency.

Since currency movements depend on the relationship between two currencies, an increase in one currency necessarily means a decrease in the other within the pair.

( Types of Currency Pairs

Forex pairs are divided into three main groups:

1- Major Pairs )Majors###
Include the most traded currencies globally, representing strong economies, characterized by high liquidity and narrow 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)

2- Minor Pairs (Minors)
Also called cross pairs, they do not include the US dollar. They are less active than majors, but trading costs are often higher:

• EUR/GBP (Euro vs. British Pound)
• EUR/CHF (Euro vs. Swiss Franc)
• GBP/JPY (Pound vs. Yen)
• CAD/JPY (Canadian Dollar vs. 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 (Pound vs. Polish Zloty)

Basic Forex Terms

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

2. Lot: A measurement unit that determines the size of a trade, divided into (standard, mini, micro) types to facilitate trading volume control and risk management.

3. Pip: The unit measuring the change in a currency pair’s price, usually representing the movement in the fourth decimal place. Example: EUR/USD moves from 1.1000 to 1.1001 = a movement of 1 pip.

4. Leverage: A tool that allows increasing the size of a trade using a small portion of capital (“margin”), which amplifies potential profits but also doubles the potential losses.

5. Margin: The small amount of the trade’s value used as collateral to open and manage leveraged positions.

Forex Market Trading Hours

Forex is one of the few markets that operates almost continuously. Trading begins with the opening of the Sydney session on Monday morning and continues until the close of the New York session on Friday evening.

The main trading sessions are sequential:

• Asian session: Sydney, Tokyo, Singapore
• European session: London, Frankfurt, Paris
• North American session: New York, Toronto

The best trading times occur during overlapping sessions, especially when London overlaps with New York, where trading volume and liquidity increase significantly.

Factors Influencing the Forex Market

1. Central Bank Monetary Policies
Interest rate decisions and quantitative easing directly impact currency value. Raising rates makes a currency more attractive, while lowering them reduces demand.

2. Inflation and Economic Growth
Inflation diminishes the currency’s purchasing power, while economic growth attracts investments and strengthens the currency.

3. Government Intervention
Central banks sometimes intervene directly in the Forex market to support or devalue their currency to achieve economic goals.

4. Political and Geopolitical Crises
Unstable political events lead investors to seek “safe-haven” currencies like the US dollar and Japanese yen.

Types of Trading Strategies

(Long-term Trading)
Relies on holding positions for weeks, months, or even years. Focuses on fundamental analysis, economic growth rates, and central bank policies.

Advantages:

• Flexibility to monitor without constant screen time
• Focus on major trends
• Ample time for analysis and decision-making
• Less psychological pressure

###Short-term Trading###
Focuses on daily or intraday price movements for quick profits. Positions last from minutes to a few days.

Includes strategies:

• Scalping (: Opening and closing trades within minutes
• Day Trading ): Opening and closing trades within the same day
• Swing Trading (: Holding positions for several days or weeks

Advantages:

• Faster profit opportunities
• Exploiting market volatility
• 24-hour market availability according to your schedule
• Reducing overnight risk by closing positions daily

Advantages and Challenges of Forex Trading

)Advantages✅

• 24-hour trading: Operates five days a week, providing flexibility to trade anytime
• Low capital requirements: Can start with relatively small capital thanks to leverage and narrow spreads
• High liquidity: The most liquid market in the world, facilitating large trades
• Diverse profit opportunities: From short-term to long-term trading

(Challenges❌

• High risks: Possibility of losing all capital
• Difficult to learn: Requires knowledge of technical and fundamental analysis and risk management
• Continuous price volatility: Offers profit opportunities but increases the risk of losses
• 24-hour management: Demands constant monitoring or advanced tools for managing trades

Basic Technical Indicators

• Moving Averages: Help identify overall trend and reduce daily volatility effects
• Relative Strength Index )RSI###: Shows if the price is overbought or oversold
• MACD Indicator: Indicates overall trend and potential market reversals
• Bollinger Bands: Reveal market volatility and sudden movements
• Support and Resistance Levels: Specific prices where the market pauses or reverses

Essential Tips for Beginners

💡 Learn the basics first: Study currency pairs and influencing factors before risking your capital

💡 Set a clear plan: Define your goals, risk level, and strategy, and stick to it

💡 Use a demo account: Start with a demo account to apply your plan and test the market without risking real money

💡 Manage risks effectively: Set risk per trade ###1-2% of capital(, and use stop-loss and take-profit orders

💡 Control your emotions: Don’t let losses or greed control your decisions

💡 Follow economic news: Stay informed about economic and political data affecting currencies

💡 Continuous learning: Read analyses, follow market performance, and continually develop your skills

Summary

The Forex market is the largest and most important financial market worldwide, offering multiple opportunities for traders, individuals, companies, and even central banks. Its high liquidity and 24-hour availability give traders great flexibility.

Almost anyone can start trading, whether beginners with small capital or professionals with advanced tools. Success depends on continuous learning, skill development, and emotional control.

Whether your goal is short-term profits or building a long-term investment strategy, understanding the market, proper planning, and using the right tools make trading safer and more effective. Forex is not just currency exchange; it’s an ongoing educational experience to understand the global economy and profit from financial opportunities wisely.