What is forex and how does it work?
Take a closer look at everything you’ll need to know about forex, including what it is, how you trade it and how leverage in forex works. Interested in forex trading with us?
What is forex trading?
Forex trading, also known as foreign exchange or FX trading, is the conversion of one currency into another. FX is one of the most actively traded markets in the world, with individuals, companies and banks carrying out around $6.6 trillion worth of forex transactions every single day.
While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken by forex traders to earn a profit. The amount of currency converted every day can make price movements of some currencies extremely volatile – which is something to be aware of before you start forex trading.
We’re one of the world leading retail forex providers7 – with a range of major, minor and exotic currency pairs for you to go long or short on.
What is a forex pair?
A forex pair is a combination of two currencies that are traded against each other. There are hundreds of different combinations to choose from, but some of the most popular include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/JPY) and the British pound against the US dollar (GBP/USD).
What are the base and quote currencies?
The base currency is always on the left of a currency pair, and the quote is always on the right. The base currency is always equal to one, and the quote currency is equal to the current quote price of the pair – which shows how many of the quote currency it’ll cost to buy one of the base. So, when you’re trading currency, you’re always selling one to buy another.
What is a pip in forex?
A pip in forex is usually a one-digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to $1.35371, then it has moved a single pip. But, if you’re trading JPY crosses, a pip is a change at the second decimal place. A price movement at the fifth decimal place in forex trading is known as a pipette.
What is a lot in forex trading?
Currencies are traded in lots, which are batches of currency used to standardise forex trades. As forex price movements are usually small, lots tend to be very large. For example, a standard lot is 100,000 units of the base currency.
How does forex trading work?
Forex trading works like any other transaction where you are buying one asset using a currency. In the case of forex, the market price tells a trader how much of one currency is required to purchase another. For example, the current market price of the GBP/USD currency pair shows how many US dollars it would take to buy one pound.
Each currency has its own code – which lets traders quickly identify it as part of a pair. We’ve included codes for some of the most popular currencies below.
What does it mean to buy or sell a currency pair?
To buy a currency pair means that you expect the price to rise, indicating that the base currency is strengthening relative to the quote currency. To sell a currency pair means that you expect the price to fall, which would happen if the base currency weakened against the quote.
For example, you’d ‘buy’ the GBP/USD pair if you think that the pound will strengthen against the dollar – meaning you’ll need more dollars to buy a single pound. Or, you’d ‘sell’ this pair if you think that the pound will weaken against the dollar – meaning you’ll need fewer dollars to buy a single pound.
What is the spread in forex trading?
The spread in forex trading is the difference between the buy and sell prices. For example, the buy price might be 1.3428 and the sell price might be 1.3424. For your position to be profitable, you’ll need the market price to either rise above the buy price or fall below the sell price – depending on whether you’ve gone long or short.
What are margin and leverage in FX trading?
Margin refers to the initial deposit you need to commit in order to open and maintain a leveraged position. So, a trade on EUR/USD might only require a 0.50% margin in order for it to be opened. As a result, instead of needing $100,000 to open a position, you’d only need to deposit $500.
Why do people trade forex?
Taking a position on currencies strengthening or weakening
Traders make a prediction on forex pairs to profit from one currency strengthening or weakening against another. When the price of a pair is rising, it means that the base is strengthening against the quote and when it’s falling, the base is weakening against the quote.
That’s because a rising price means that more of the quote are needed to buy a single unit of the base, and a falling price means that fewer of the quote are needed to buy one of the base. So, traders would likely go long if the base is strengthening relative to the quote currency, or short if the base is weakening.
Some of the most popular forex trading styles are scalping, day trading, swing trading and position trading. You might choose a different style depending on whether you have a short- or long-term outlook.
Hedging with forex
Hedging is a way to mitigate your exposure to risk. It’s achieved by opening positions that will stand to profit if some of your other positions decline in value – with the gains hopefully offsetting at least a portion of the losses. Currency correlations are effective ways to hedge forex exposure. An example would be EUR/USD and GBP/USD, which are positively correlated because they tend to move in the same direction. So, you could go short on GBP/USD if you had a long EUR/USD position to hedge against potential market declines.
Seize opportunity 24 hours a day
The forex market is open 24 hours a day thanks to the global network of banks and market makers that are constantly exchanging currency. The main sessions are the US, Europe and Asia, and it’s the time differences between these locations that enables the forex market to be open 24 hours a day.
The forex trading market hours are incredibly attractive, offering you the ability to seize opportunity around the clock. We are also the only provider to offer weekend trading on certain currency pairs, including weekend GBP/USD, EUR/USD and USD/JPY. That means you can trade these combinations when others can’t.
Learn how currency markets work
What moves the forex market?
- Central banks
- News reports
- Market sentiment
The forex market is made up of currencies from all over the world, which can make exchange rate predictions difficult as there are many forces that can contribute to price movements. That said, the following factors can all have an effect on the forex market.
Central banks
A currency’s supply is controlled by central banks, who can announce measures that will have a significant effect on that currency’s price. Quantitative easing, for example, involves injecting more money into an economy, and can cause a currency’s price to fall in line with an increased supply.
News reports
Commercial banks and other investors tend to want to put their capital into economies that have a strong outlook. So, if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency. If negative news hits, then demand might be expected to fall. This is why currencies tend to reflect the reported economic health of the region they represent.
Market sentiment
Market sentiment, which often reacts to the news, can also play a major role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand.
How to become a forex trader
Learn the ways to trade forex
There are several ways to trade forex, including trading spot forex, forex futures and currency options. When you trade with us, you’ll be predicting on the price of spot forex, futures and options either rising or falling with a CFD account.
- Spot forex trading lets you trade forex pairs at their current market price with no fixed expiries
- Forex or currency futures enable you to trade forex pairs at a specified price to be settled at a set date in the future or within a range of future dates
- Forex or currency options let you trade contracts that give the holder the right, but not the obligation, to buy or sell a currency pair at a set price, if it moves beyond that price within a set time frame
All of these – spot, futures and options – can be traded with and FX CFDs. These are financial derivatives which let you predict on whether prices will rise or fall without having to own the underlying asset.
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All content disseminated and distributed by Fusion Funded and its affiliates (collectively referred to as the “Company”) is intended to be treated solely as general information. The information provided by the Company or presented herein is not meant (a) as investment advice, (b) as an offer or solicitation of an offer to buy or sell, or (c) as a recommendation, endorsement, or sponsorship of any security, company, or fund. Testimonials featured may not be indicative of other clients or customers and do not guarantee future performance or success. Fusion Funded does not operate as a broker and does not accept client deposits. All program fees are allocated for operational costs, encompassing but not limited to staff, technology, and other business-related expenses. Fusion Funded does not engage in regulated activities; its exclusive operations involve simulated Prop Trading and Trading Education, and thus, it is not required to obtain authorization from regulatory authorities.
USEFUL LINKS
Your money is in trusted hands
- Worldwide payments
- Fast and easy payouts
All content disseminated and distributed by Fusion Funded and its affiliates (collectively referred to as the “Company”) is intended to be treated solely as general information. The information provided by the Company or presented herein is not meant (a) as investment advice, (b) as an offer or solicitation of an offer to buy or sell, or (c) as a recommendation, endorsement, or sponsorship of any security, company, or fund. Testimonials featured may not be indicative of other clients or customers and do not guarantee future performance or success. Fusion Funded does not operate as a broker and does not accept client deposits. All program fees are allocated for operational costs, encompassing but not limited to staff, technology, and other business-related expenses. Fusion Funded does not engage in regulated activities; its exclusive operations involve simulated Prop Trading and Trading Education, and thus, it is not required to obtain authorization from regulatory authorities.