How Forex Trading Works
Forex trading works by exchanging one currency for another in order to make a profit from price movements.
The forex market operates globally and does not have a centralized exchange.
Understanding Currency Pairs
In forex trading, currencies are always traded in pairs. One currency is bought while the other is sold.
- Base Currency: The first currency in the pair
- Quote Currency: The second currency in the pair
Example: In EUR/USD, EUR is the base currency and USD is the quote currency.
Buy and Sell in Forex Trading
Forex trading has two basic actions:
- Buy (Long): You expect the price to go up
- Sell (Short): You expect the price to go down
If you buy EUR/USD, you are buying euros and selling US dollars at the same time.
How Traders Make Money
Traders make money by buying a currency at a lower price and selling it at a higher price,
or selling at a higher price and buying it back at a lower price.
Example:
- Buy EUR/USD at 1.1000
- Sell EUR/USD at 1.1050
- The difference is your profit
What is a Pip?
A pip is the smallest price movement in a currency pair.
For most pairs, one pip equals 0.0001.
Example: If EUR/USD moves from 1.1000 to 1.1005, it has moved 5 pips.
Role of Forex Brokers
Forex brokers provide a trading platform where traders can place buy and sell orders.
They connect retail traders to the global forex market.
- Provide trading platforms
- Offer leverage
- Execute trades
Leverage in Forex Trading
Leverage allows traders to control a larger position with a smaller amount of money.
Example: With 1:100 leverage, you can control $10,000 with only $100.
Warning: Leverage increases both profits and losses.
Forex Market Hours
The forex market runs 24 hours a day, 5 days a week.
- Asian Session
- London Session
- New York Session
The highest trading activity happens when London and New York sessions overlap.
Why Forex Trading is Beginner-Friendly
- Low entry cost
- Demo accounts available
- 24/5 market access
- High liquidity
Final Thoughts
Understanding how forex trading works is the foundation of becoming a successful trader.
Before trading with real money, beginners should practice using a demo account and learn proper risk management.
