What Is Forex Trading?
Forex trading, also known as foreign exchange trading or FX trading, refers to the process of buying and selling currencies in the global financial market. The forex market is the largest and most liquid financial market in the world, with trillions of dollars traded daily.
Forex trading involves exchanging one currency for another, with the goal of profiting from changes in exchange rates. For example, traders may buy the Euro (EUR) while selling the US Dollar (USD) if they believe the euro will strengthen.
How the Forex Market Works
The forex market operates 24 hours a day, five days a week, covering major financial centers such as London, New York, Tokyo, and Sydney. Unlike stock markets, forex trading is decentralized, meaning there is no single physical exchange.
Currencies are traded in pairs, such as:
- EUR/USD (Euro / US Dollar)
- GBP/USD (British Pound / US Dollar)
- USD/ZAR (US Dollar / South African Rand)
Each pair shows how much of the quote currency is needed to buy one unit of the base currency.
Key Forex Trading Terms Explained
Understanding common forex terms is essential for beginners:
- Pip: The smallest price movement in a currency pair.
- Spread: The difference between the buying and selling price.
- Leverage: Allows traders to control larger positions with a smaller capital amount.
- Margin: The amount required to open and maintain a leveraged trade.
- Lot Size: The standardized quantity of currency units traded.