What Is Forex Trading?

Forex is the most valuable and active financial market in the world - and one of the many that you can trade with Tradu. Read our forex market guide to learn the fundamentals of how it works, how to trade it and much more, then take your first steps with confidence.

In this guide to forex trading for beginners, we cover:

What is forex trading?
How does forex trading work?
How to make money with forex trading?
Types of currency pairs
Other key forex market terminology
What moves forex market prices?
Pros of forex trading
Cons of forex trading
How to trade forex
What are forex CFDs
Forex trading strategies
Fundamental and technical analysis
How to begin forex trading
Forex market FAQs

Forex trading involves trading pairs of national currencies. This takes place for business and travel purposes, too, but we're focusing on trading to profit from fluctuating exchange rates. The term 'forex' stands for foreign exchange; it's also known as currency or foreign exchange trading or FX trading.

Whereas stocks and other assets are traded on central exchanges, currencies are mostly bought and sold over the counter (OTC) via a global network of banks, dealers and brokers. It's big business, too. Between individuals, companies and banks, the forex market generates $7.5 trillion in daily transactions.

This makes it the biggest and most active financial market in the world. Its international scope means the market is open 24 hours a day on weekdays, presenting a wealth of opportunities if you can learn its ways.

How does forex trading work?

As a forex trader, you'll make predictions about one nation's currency rising or falling in value compared to another. This combination of currencies is called a currency or forex pair. You might make these calls based on a range of factors affecting currency value, such as strong (or weak) economic performance.

Each currency has a three-letter code usually based on the country and the currency name. So if you trade the British pound (GBP) against the US dollar (USD), for example, the currency pair is GBP/USD.

The currency on the left is the base currency which is always shown as one. The currency on the right is the quote currency, which shows how much of the quote currency it costs to buy one of the base. Using the same example pair above, an exchange rate of 1.2 means that one British pound costs 1.2 US dollars.

How to make money with forex trading

Armed with a quote for your chosen pair, your options for opening a position are generally:

Buying the pair if you think that the base currency will strengthen against the quote currency, knowing as going long.
Selling the pair if you think that the base currency will weaken against the quote, known as going short.

You stand to profit if your prediction is correct.

Types of currency pairs

There are four main types of pair that you can trade:

Major: Actively traded pairs with relatively low volatility, always involving the US dollar, e.g. EUR/USD.
Minor: Pairs that don't feature the US dollar but use at least one of three other major currencies - the Japanese yen, British pound or euro - e.g. GBP/AUD (Australian dollar).
Exotic: Typically pairs featuring an emerging market country leading to higher volatility, e.g. USD/HKD (Hong Kong dollar).
Regional: Pairs based on region, such as the NOK/SEK (Norweigan krone and Swedish krona) hailing from Scandinavia.

Read more about them in our currency pairs guide.

Other key forex market terminology

Learning to trade forex means getting to grips with the language. As well as the terms that we've explained above, here's some other key terminology that you're likely to see while trading:

Ask: The lowest price at which you're willing to buy a currency as a trader.
Bid: The price at which you're willing to sell a currency.
Bear market: Used to describe a declining currency market, often due to poor economic trends or catastrophic events like natural disasters. As a bear trader, you'll predict prices to fall and may hold short positions.
Bull market: Used to describe a rising currency market - for example, due to positive global economic news. As a bull trader, you'll expect prices to rise and may take long positions.
Lot: Currencies are traded in standardised sizes known as lots. Standard lots are 100,000 units, mini lots are 10,000 units, micro lots are 1,000 units and rare nano lots are 100 units. The bigger the lot, the higher your profits or losses.
Leverage: A borrowing tool allowing you to open a position worth more than you deposit, multiplying your potential profits or losses. You can trade with different amounts of leverage - for example, 10x or 20x your deposit. Learn more about leverage.
Margin: The minimum initial deposit that you need to commit to open (and maintain) a position at your specified leverage. Margin is effectively a fraction of a full leveraged trade.
Pip: A 'percentage in point' or 'point interest point'; usually a one-digit movement in the fourth decimal place of a currency pair price. If GBP/USD moves by one pip, for example, it could rise from 1.2225 to 1.2226.
Spread: The difference between the sell (bid) price and buy (ask) price for a currency pair, also known as bid/ask spread. To profit, you'll need the market price to rise above the buy price if you go long or fall below the sell price if you go short.

The trading world is full of its own words and phrases. Learn lots more common terms like these in our trading glossary.

What moves forex market prices?

Foreign exchange rates fluctuate constantly throughout the trading day based on investor sentiment and comparative currency demand. Lots of factors can drive price movements, with different issues affecting different currencies due to their geography or other unique characteristics.

Key factors to monitor as a forex trader include:

Economic news: Forex markets often react to economic trends and data releases, such as gross domestic product (GDP) and employment figures.
Political events: Domestic and international political news, such as elections, trade partnerships and war, in severe cases, all affect investor sentiment.
Interest rates: Monetary policy set by central banks can also attract or deter investors. High interest rates - often used to control rising inflation - tend to do the former as they increase the value of money.
Commodity prices: The cost of commodities drives certain currencies in different directions, too, depending on a nation's importing or exporting habits.

Get extra detail and learn other factors to track in our guide to factors affecting forex prices.

Pros of forex trading

Thinking about diversifying your portfolio with forex? Here are some of the key reasons to enter the market:

Liquidity: Huge daily trading volumes usually make it quick and easy to enter or exit a position for a small spread, particularly in any of the major currencies.
Trading hours: The forex market is open 24 hours a day, except for weekends, presenting plenty of opportunities to make profits or cover losses.
Leverage: Use of leveraged products like CFDs means that you can start trading with less initial capital, multiplying your exposure and potential profits.

Cons of forex trading

Just like any financial market, forex comes with some risks, too. Make sure that you understand and manage them in a way that suits your trading strategy and preferences.

Volatility: Certain currencies - usually those of major global economies and not emerging ones - are more stable than others. However, forex trading in general can be more volatile than some financial markets.
Leverage: It's important to fully understand how leverage works before trading with it. While it could multiply profits, it'll do the same for losses if the market goes against you.
Economic knowledge: Trading currencies successfully demands a good understanding of domestic and global economic fundamentals. Building a solid foundation knowledge and monitoring key indicators will give you more confidence.

How to trade forex

With us, you can trade through forex CFDs.

What are forex CFDs?

Forex contracts for difference (CFD) are contracts between a broker (us) and trader (you), with one party agreeing to pay the other the difference in the value of a pair. They allow you to speculate on price movements both ways - i.e. long or short - without actually owning the asset.

What is a forex trading strategy?

When first learning to trade forex, having a strategy will guide the opportunities for which you look and how you trade them. There are lots of different approaches that you could take - here are some of the most popular:

Day trading: Opening and closing positions within a day, monitoring trends throughout.
Swing trading: Keeping trades open for days or weeks looking for peak high or low prices before in anticipation of a turnaround or 'swing'.
Position trading: A longer-term strategy following the direction of a currency pair over time, be it weeks, months or even years.
Trend trading: Using historical price movements to identify future trends, whether over the short, long or medium term.

Learn more about these approaches and how you might apply them in our guide to forex trading strategies.

Fundamental and technical analysis

You can base individual trade decisions on a combination of fundamental and technical analysis:

Fundamental analysis uses economic and other broad data points to judge the health of a country and, by extension, its currency.
Technical analysis focuses on currency price movements, primarily using charts, to identify patterns.

In short, technical analysis tells you when to trade, and fundamental analysis helps you understand why. Read more in our analysis guides.

How to begin forex trading

Set up a trading account : Sign up for your trading account online with Tradu. It takes just a few minutes.
Learn the basics. Our market, trading and platform guides will help you to get up to speed.
Develop a trading strategy. Choose the currency pairs in which you want to invest, learn their drivers and decide how you'll trade them.
Make your first move. Opening a position through our platform is quick and easy, helping you to take advantage of opportunities exactly as you see them.
Monitor and close your position. Use fundamental and technical analysis to call when to execute.

Build your skills and portfolio. Research other currency pairs and asset classes, including listed stocks and CFDs on stocks, crypto, commodities and indices. Diversify your portfolio with confidence, all from one trading account.

Forex market FAQs

Is the forex market safe?

Due in part to its size, there is no central forex regulator. Instead, trading bodies around the world supervise it on a domestic level, along with other financial markets, to make sure that providers meet certain standards.

Is forex trading profitable?

It can be if you build a strong market understanding and trading strategy and monitor the right price drivers. It comes with serious risks, however, especially if trading with leverage which can multiply your losses. Most retail traders lose money trading forex.

You should make sure to learn the basics and do market research, as well as balancing risk, before making any trade. Read more in our guide to trading risk management.

What are forex market trading hours?

Thanks to forex's global scope, markets are open for trading 24 hours a day on weekdays, opening on Sunday evenings and closing on Friday evenings.

This can present different opportunities throughout each trading day in line with key market drivers such as economic data releases.

What is a forex broker?

A forex broker offers access to trading platforms which you can use to buy and sell currency pairs. We're a forex broker and help you to trade forex in line with your strategy through our Tradu platform.

Forex brokers charge fees for their service either through commission or as part of a spread. You'd pay a separate fee with the former. With the latter, you'll buy slightly above the market price or sell just below the market price, depending on your position.

Other market guides

Stock Trading Guide

Commodities Trading Guide

Indices Trading Guide

With Tradu you can trade crypto via CFDs.

What Is Forex Trading?