When you begin to learn about forex trading, it can seem complex, especially with the vastness of the market. With over 7 trillion USD traded all every day by all types of market participants, there is a lot of potential for profit, but also risks to keep in mind.
For beginners looking to start out, it’s important to know that forex trading isn’t just about buying and selling currencies without aim or reason. Many factors, like world economies, political events, and market mood, play a big role in how currency pairs move, and this can influence trading strategies.
In this guide, we’ll break things down to help you get a solid first grasp of forex trading. You’ll learn the basics, explore the different types of markets, and follow a straightforward plan to get started.
What is forex trading?
Forex trading, or foreign exchange trading, is the process of buying and selling currencies on the world market. Unlike stock trading, which involves shares of companies, forex trading focuses on exchanging one currency for another.
This happens in pairs, such as EUR/USD, where euros are traded against US dollars. The value of these currencies fluctuates based on factors like interest rates, economic data, and geopolitical events.
Key points to know about forex trading:
Decentralised market. Forex trading occurs over the counter (OTC), meaning there’s nomor central exchange. Transactions are conducted electronically between parties worldwide.
Market hours. The forex market operates 24 hours a day, five days a week, beginning with the Asian markets on Monday and closing after the New York session on Friday.
Trading volume. It’s the largest financial market globally, with a daily trading volume exceeding $7 trillion, offering high liquidity and quick transactions.
Common currencies. The most traded currencies include the US dollar (USD), Euro (EUR), Japanese yen (JPY), and British pound (GBP), which are part of the major currency pairs.
Forex trading serves a few purposes:
Profit. Traders aim to make money from price movements by buying low and selling high or selling high and buying low.
Hedging. Businesses use forex to protect against unfavourable currency shifts, stabilising costs and reducing financial uncertainty.
While forex trading offers opportunities, it also comes with significant risks. The market’s size and world reach mean prices can change rapidly, influenced by economic indicators, policy decisions, and unexpected events. A solid understanding of these factors is crucial for anyone looking to start trading forex successfully.
Types of forex markets
Understanding the different types of forex markets is crucial for any beginner. Here’s a brief overview of some terms you may encounter when trading currencies:
- Spot market
The spot market is the most straightforward and common style of forex trading. Here, currencies are bought and sold for immediate delivery based on the current market price. Transactions are quick, usually settled within two business days, making it a favourite for traders who prefer immediate results. - Forward market
In the forward market, traders agree to buy or sell currencies at a future date for a price agreed upon today. This style of market is typically used for hedging against future price fluctuations. Contracts in the forward market are customised between parties, allowing businesses to manage currency risk effectively. - Futures market
The futures market is similar to the forward market but with standardised contracts that are traded on regulated exchanges. These contracts lock in the price of a currency at a set date in the future, providing a more structured environment compared to the forward market. - Options market
The options market allows traders the right, but not the obligation, to buy or sell currencies at a specific price before a certain date. This market provides flexibility and is often used by more experienced traders to manage potential risks while keeping their options open.
These are the key types of forex markets you’ll encounter. Each serves different purposes, but as a beginner, it’s wise to focus on the spot market first.