Forex Basics: What Is Forex And How Does It Work?
Forex (Foreign Exchange) is the largest financial market in the world with a daily volume of over $7 trillion. But what is it exactly?
What Is Forex?
Forex is the exchange of one currency for another. When you go on vacation and exchange euros for dollars, you are already engaging in forex.
In trading, this means: you buy a currency pair hoping that one currency strengthens against the other.
Currency Pairs
Forex is always traded in pairs. The most traded pairs are:
- EUR/USD — Euro vs US Dollar
- GBP/USD — British Pound vs US Dollar
- USD/JPY — US Dollar vs Japanese Yen
- USD/CHF — US Dollar vs Swiss Franc
When you buy EUR/USD, you expect the euro to strengthen against the dollar.
How Do You Make Money?
Forex works with small price movements. A 'pip' (percentage in point) is the smallest price change — usually the fourth decimal.
If EUR/USD moves from 1.1000 to 1.1010, that is a movement of 10 pips.
To make meaningful profit, traders use 'lot sizes':
- Standard lot (1.0): 100,000 units — 1 pip = $10
- Mini lot (0.1): 10,000 units — 1 pip = $1
- Micro lot (0.01): 1,000 units — 1 pip = $0.10
When Is Forex Open?
Forex is open 24 hours a day, 5 days a week. The main sessions are:
- Sydney (22:00 - 07:00 CET)
- Tokyo (00:00 - 09:00 CET)
- London (08:00 - 17:00 CET)
- New York (13:00 - 22:00 CET)
The overlap between London and New York (13:00 - 17:00 CET) is usually the most active.
Why Is Forex Popular?
- Accessible — you can start with a small amount
- Liquid — there is always someone to trade with
- Open 24 hours — trade when it suits you
- Bi-directional — you can trade both rising and falling markets
Conclusion
Forex is accessible but not easy. The basics are simple — buying and selling currencies — but becoming consistently profitable requires knowledge, discipline, and risk management.
Do you want to learn how to trade forex? Book a free educational call with TradingUnie.
