What Is Forex Currency Trading?

Forex trading involves buying and selling currencies on the global market. Learn how it works, who uses it, and how to manage the risks.

What is forex currency trading?

If you've come across the term forex trading while reading about global finance or investing, you might be wondering what it actually involves. This guide is written for beginners, international investors, business owners, and anyone interested in learning how the foreign exchange market works. We’ll explain what forex trading is, how it operates, who uses it, and how to approach it responsibly.

Forex trading: an overview

Forex stands for foreign exchange, and forex trading refers to the buying and selling of currencies on the global currency market. It’s the largest and most liquid financial market in the world, with over $6 trillion traded daily (as of 2023), operating 24 hours a day, five days a week.

The goal of forex trading is to exchange one currency for another in the hope that the value will change in your favour—enabling you to make a profit.

How does forex currency trading work?

Currencies are always traded in pairs, such as:

  • EUR/USD – Euro vs. US Dollar

  • GBP/JPY – British Pound vs. Japanese Yen

  • USD/ZAR – US Dollar vs. South African Rand

When you trade a currency pair, you’re buying the base currency (the first in the pair) and selling the quote currency (the second). For example, if you buy EUR/USD, you’re buying euros and selling dollars.

Forex prices fluctuate due to a range of factors, including:

  • Interest rate changes

  • Economic indicators (like GDP or inflation)

  • Geopolitical events

  • Market sentiment and speculation

Who trades forex?

Forex trading is used by:

  • Central banks and governments to manage reserves and stabilise currencies

  • Multinational companies to hedge against exchange rate fluctuations

  • Banks and institutional investors for portfolio management and speculation

  • Retail traders (individuals) looking to profit from short-term price movements

Retail forex trading has grown significantly with the rise of online platforms, giving individuals access to the same market as large institutions—but usually with smaller trade sizes and higher risk exposure.

Types of forex markets

There are three main ways to trade forex:

  1. Spot market – Buying and selling currencies at current market prices.

  2. Forward market – Contracts to exchange currencies at a future date, agreed in advance.

  3. Futures market – Standardised contracts traded on exchanges for future delivery of currency.

Retail traders mostly operate in the spot market, using brokers or trading platforms to execute trades in real time.

Pros and cons of forex trading

Advantages:

  • High liquidity: You can enter and exit trades quickly due to massive daily volume.

  • 24-hour market: Open Monday to Friday across global time zones.

  • Low entry barriers: Many platforms allow trading with small capital via leverage.

  • Diverse opportunities: Trade currency pairs across developed and emerging markets.

Risks and drawbacks:

  • High volatility: Rapid price swings can lead to large losses.

  • Leverage amplifies risk: You can lose more than you invest if a trade moves against you.

  • Emotional pressure: The fast-paced environment can encourage overtrading.

  • Complex for beginners: Requires a strong understanding of technical and fundamental analysis.

Key terms in forex trading

  • Pip: The smallest price move in a currency pair, often 0.0001.

  • Spread: The difference between the buy (ask) and sell (bid) price.

  • Leverage: Borrowed capital to increase trade size, e.g. 50:1 leverage means you can trade £5,000 with £100.

  • Margin: The deposit required to open a leveraged trade.

  • Lot: A standard trading size (e.g. 100,000 units for a standard lot).

Tips for getting started with forex trading

  • Use a demo account first to practise trading without risking real money.

  • Choose a regulated broker to ensure your funds and data are protected.

  • Start with major currency pairs (like EUR/USD or GBP/USD), which are more stable and have lower spreads.

  • Set stop-loss orders to limit your potential losses.

  • Don’t rely on luck—educate yourself in risk management, market analysis, and trading psychology.

FAQs

Is forex trading the same as investing?
Not quite. Forex trading is generally short-term and speculative, whereas investing typically involves buying assets for long-term growth or income.

Can you make money trading forex?
Yes, but most beginners lose money. Success requires knowledge, discipline, and a well-tested strategy.

Is forex trading legal in the UK?
Yes. Forex trading is regulated by the Financial Conduct Authority (FCA) in the UK. Always use a regulated broker.

What’s the best time to trade forex?
Liquidity is highest during overlapping sessions, such as when the London and New York markets are open at the same time.

Real-life example

A UK-based trader notices that the GBP/USD rate is falling due to weak UK inflation data. They sell GBP and buy USD (going short on the pair). When the price drops further, they close the trade for a profit. However, if the pound had rebounded, they could have incurred a loss.