Foreign exchange (forex) is the most liquid and traded market in the world. According to the Bank for International Settlements (BIS), it recorded an average daily trading volume of approximately $7.5 trillion in April 2022. This high volume of trading can be attributed to the availability of forex markets; one of the few industries in the world, the forex markets operate 24 hours a day, five days a week.
Key Takeaways
- Forex, short for foreign exchange, is a global network of buyers and sellers who buy, sell, and exchange currencies.
- Forex trading involves monitoring and capitalising on price movements of currency pairs, such as EUR/USD (euro/US dollar), USD/JPY (US dollar/Japanese yen), and GBP/USD (British pound/US dollar).
- Effective risk management, including stop-loss orders and proper leverage, is important for successful forex trading.
On average, approximately $850 million in transactions are conducted every second in forex, making it the largest financial market in the world. In this blog, we will explore what forex is and how forex trading works, why forex appeals to traders, and how users can start trading forex.
What is Forex Trading?
Forex, short for foreign exchange, is a network of buyers and sellers who exchange currencies between each other at an agreed price. It is a decentralised financial market that operates 24 hours a day, five days a week, and is the backbone of international trade and investments.
Forex trading involves exchanging one currency for another, and it has numerous practical uses, but it is mostly used to make profits through currency conversions. It consists of monitoring and capitalising on price and rate movements of currency pairs, such as EUR/USD (Euro/US dollar), where the value of one currency is compared against another. Traders profit by predicting price changes and exchange rates between currency pairs and buying and selling at the appropriate times.
How Does Forex Trading Work?
Forex trading involves two currencies: the base currency and the quote currency. In the case of the EUR/USD pair:
- EUR is the base currency
- USD is the quote currency
If the price of the EUR/USD pair is 1.10, it means 1 Euro equals 1.10 US Dollars. When trading forex, traders predict whether the base currency will strengthen (increase) or weaken (decrease) against the quote currency. Assets like shares and commodities are traded over exchanges. Regarding forex, there is no central marketplace, and trading occurs between two parties in an over-the-counter (OTC) market. The major forex trading centres are spread globally in major time zones—London, New York, Sydney, and Tokyo—facilitating round-the-clock trading. Since forex lacks a central location and is a network spread across the globe, it can be traded 24 hours a day, five days a week.
Forex trading consists of “bid” and “ask” prices. The “bid” is the price at which a currency pair is sold, and the “ask” is the price at which a currency pair is to be bought. The difference between the bid and ask is known as the “spread”. In forex trading, traders utilise three main types of orders to trade forex and implement effective risk management successfully:
- Market Orders: Traders buy and sell currency pairs at the current market price.
- Limit Orders: Traders buy and sell currency pairs at a specified price.
- Stop Orders: A trade is completed when the price of a currency pair reaches a certain point. These are useful to minimise losses.
Why Trade Forex?
- High Liquidity: Forex is the most liquid market in the world. The availability of forex markets allows traders more actionable prices, spreads, and immediate response times.
- Accessibility: Forex trading is open 24 hours a day, five days a week, enabling traders to participate in the market regardless of their time zone.
- Leverage allows traders to access and control larger trade sizes with relatively smaller investments. However, it magnifies both potential profits and losses.
- Diverse Currency Pairs: Forex offers access to numerous currency pairs, catering to different regions, trading strategies, and preferences.
- Hedging: A risk-management strategy that protects traders against price fluctuations of currency exchange rates in international investments and trades.
Start Trading Forex Today
To begin forex trading, create an account with BitDelta Pro, which offers a wide range of forex pairs and comprehensive trading tools. After registering, download the MT5 platform, deposit funds, and start trading.
BitDelta Pro is a trusted, regulated trading platform that empowers traders to access 1,000+ financial instruments, including stocks, forex, commodities, ETFs, and more. With over 900K users from 130+ countries, BitDelta Pro is an all-in-one exchange integrated with MT5, robust security, advanced tools, and client-focused solutions to deliver seamless and transparent trading experiences.