What is forex trading and how does it work?

Interested in learning about forex trading? Take a look at everything you need to know about the forex market and how it works, as shared by the experts at Axi.

What is forex trading?

Forex trading is the act of buying and selling currencies.

In any forex trade you need to choose two currencies and speculate that one will rise or fall in value, relative to the other. For example, let’s say you think the US dollar (USD) will strengthen compared to the Euro (EUR). If it does, you earn a profit. If it doesn’t, you take a loss.

'Forex' or 'FX' is short for foreign exchange, while 'forex trading' refers to act of trading on the foreign exchange market.

How does forex trading work?

The forex trading market is not a physical marketplace. Instead, it’s a decentralised global network that operates 24 hours a day, five days a week. In the forex market, traders buy and sell ‘currency pairs’ based on the value they have against each other.

Forex Trading Times

Example of a forex trade

Here’s an example of a forex trade with the AUD/SGD currency pair:

Let’s say you are planning to travel from Singapore to Australia. So that you can spend local money when you arrive, you convert some Singapore dollars (SGD) into Australian (AUD) dollars.

The exchange rate at the time is $1 AUD = $ 1.04 SGD. Therefore, you spend 100 Singapore dollars to buy $96.15 Australian dollars. Your ‘currency pair’ is AUD/SGD.

Now let’s say you stay in Australia for a week but don’t spend any of the cash you brought with you. On the way home, you can change it back into Singapore dollars.

However, the market has now changed. Now, $1AUD equals $1.10SGD. The Singapore dollar has increased in value. Now, your $96.15 Australian dollars will buy $105.76 Singapore dollars.

You have made a profit because of the change in the value of each currency.

This is an example of a real-world use case. The only thing is, when you trade on the forex market, you are making a similar transaction without the need of travelling. Forex traders are opening these position from home, or anywhere in the world, by using a forex trading account.

Can I teach myself to trade forex?

If you’re wondering if you can teach yourself to trade forex, the answer is yes! There are many guides to forex trading, training programs through the Axi Academy, forex videos, webinars and eBooks which will walk you through the basics of forex trading and help build your skills.

It is possible for anybody to access the information they need to master forex trading. That said, it is a good idea to start out by trading virtual funds with a demo trading account so you can understand the impact of your decisions without losing real money. 

Find out more about how to trade forex before opening an account.

How does the forex market work?

When you buy and sell on the forex market, you trade one currency for another. People purchase currency based on their belief that the currency will change in value.

A number of factors influence the value of a currency on the foreign exchange; factors such as inflation, economic growth, consumer confidence in a particular country, jobless claims and house prices can all contribute to where a currency sits on the market.

Take a look at the forex economic calendar for an indication of different factors which can impact the foreign exchange market. This will start to give you an idea of how changes in currency and the forex market work.

What time do forex markets open?

Forex markets are open 24 hours a day, five days a week. The official hours are from 5 pm EST on Sunday until 4 pm EST on Friday. EST refers to the time zone that is occupied by cities including New York, Boston, Atlanta, Orlando in the US, and Ottawa in Canada (to name a few). Find out more about the forex market hours.

You’ll also see the ‘UTC’ timezone mentioned when forex is discussed. This stands for Coordinated Universal Time and aligned with what used to be GMT, or Greenwich Mean Time. London in the UK is on UTC.

Since there is no ‘lead’ market, forex trading hours are generally based around when trading is open in a participating country. London and New York’s trading sessions overlap, so there is often a lot of trading volume during this time of day. Foreign exchange rates are determined for the next 24-hour period at 4pm London/UTC time.

Forex Trading Times

How is the forex market regulated?

Despite the fact that it operates in over 180 countries, no single organisation is responsible for regulating the forex market. However, there are over 50 governing and independent bodies around the world that supervise forex trading.

Some top regulatory bodies overseeing foreign exchange activity include the Australian Securities and Investments Commission (ASIC), Financial Conduct Authority (FCA) in the United Kingdom and the Monetary Authority of Singapore (MAS). These bodies set standards for all traders to abide by, such as being registered, licensed, and undergo regular audits.

As a result of input and regulation by these authorities, forex trading is more likely to be fair and ethical.

Benefits of forex trading

There are many benefits of forex trading and unique advantages that the FX market has over other markets.

$6.6t daily trade volume

$6.6t daily trade volume

The forex market is the largest financial market in the world

Anyone can trade forex

Anyone can trade forex

Less capital is required to get started

Decentralised market

Decentralised market

Market is directly influenced by the performance of global economies

500:1 Leverage

500:1 Leverage

Open larger positions with smaller initial investment

24 hour market

24 hour market

Trade forex 24 hours a day, 5 days a week

Go 'long' or 'short'

Go 'long' or 'short'

Going long or short means profit and loss is possible whatever way the market moves

With the benefits of forex trading, there is also a risk of losing money. As with all forms of investing, there is no guarantee you will achieve financial success through this method of trading.

What are the main currency pairs to trade in forex?

Not every currency is traded all day every day, even with the market being open throughout the week. Monitor live forex spreads of the most traded currency pairs to watch the market. The most commonly traded currency pairs fit into a group called 'majors', while currency pairs outside that group can fall into the 'minors' and 'exotics' groups.

Major currency pairs Minor currency pairs Exotic currency pairs
EUR/USD EUR/GBP EUR/TRY
USD/JPY EUR/JPY USD/HKD
GBP/USD GBP/JPY USD/ZAR
USD/CHF GBP/CAD JPY/NOK
USD/CAD CHF/JPY NZD/SGD
AUD/USD EUR/AUD GBP/ZAR
NZD/USD NZD/JPY AUD/MXN

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Forex trading FAQs

Going back to our Australian and Singapore dollar trade example above, the way you pair currencies on the foreign exchange is always how much of the second pair (quote currency) is needed to purchase one unit of the first pair (base currency).

With AUD/SGD, AUD is your base currency and SGD is your quote currency and you would need $1.04 Singapore dollars to purchase one unit or dollar of Australian dollars. So, the currency pair would be seen as $1.04 on the forex market.

Every currency has a three-digit code, for example the Great British Pound is the GBP and the US dollar is written as USD.

Discover more forex terminology in our forex trading for beginners guide.

While there are technically no limits to how much money you can make on the foreign exchange market, the reality is you won’t make money on every trade; nobody can tell the future with 100 percent certainty!

A highly successful forex trader may be able to generate average returns of 20% per month. But the more you trade and the more you come to understand the way currencies change, the better your chances of making money on the foreign exchange will be.

The ‘spread’ in forex is a small cost built into the buy (bid) and sell (ask) price of every currency pair trade. It is also known as ‘markup’ and is a cost you always have to pay when trading on the FX market.

A forex broker will charge a ‘spread’ on each trade. When you log in to make trades, you will see a different buy and a sell price. It is usually very minimal, for example the buy price of a currency pair may be 1.1529, while the sell price is 1.1523. The spread will be 0.0006, or 6 pips.

To calculate the spread, you subtract the bid/buy price from the ask/sell price. 

A ‘lot’ in forex trading refers to the number of units of a base currency.

A standard lot is equal to 100,000 units of the base currency in a forex trade pair.

You can also trade mini, micro and nano lots, which are 10,000, 1,000 and 100 units respectively. For example, trade a standard lot in Australian dollars and you will be committing $100,000AUD.

In forex trading, the use of leverage lets you take on trades of a higher value than the amount of capital in your trading account. For example, if the leverage ratio is 500:1 it means you can trade 500 times the amount of capital you have deposited; if the account has $1,000 deposited in it, the trader could trade at a total volume of $500,000.

This structure has the potential to be highly lucrative as it maximises returns, but it also magnifies losses. Ultimately the amount of leverage you choose to apply to any given trade is up to you.

Margin is your down payment on a leveraged trade. This is similar to purchasing a home, where you may need to put down a percentage of the total amount in order to make the purchase.

In order to use leverage on a trade, you may need to put down a margin of a few percent. For example, your FX broker may offer 100:1 leverage if you agree to put down margin of $1,000. So, the trade can go ahead using 1 percent of your money to trade a standard lot of 100,000 units.

In this scenario, the trader must deposit money into their margin account before any trades can be made.

Short for ‘Percentage In Points’, the ‘pip’ change in the value of a currency is reflected in the fourth decimal point. For example, if the SGD is valued at $0.9630 and increases by two ‘pips’, it will then be valued at $0.9632 against the Australian dollar.

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