What is forex and how does it work: a beginner's guide

The currency market

Forex (foreign exchange) is the market where currencies are traded. According to the Bank for International Settlements it is the largest financial market in the world, with daily turnover above 7 trillion US dollars.

There is no central exchange: trading happens directly between banks, dealers and other participants, electronically, 24 hours a day from Monday to Friday.

How to read a currency pair

Currencies are always traded in pairs. In EUR/USD = 1.1000 the first currency (EUR) is the base and the second (USD) is the quote currency: 1 euro costs 1.10 US dollars.

Buying EUR/USD means betting that the euro will strengthen against the dollar; selling means betting on the opposite.

The major pairs

The majors are the pairs that include the US dollar, and they are the most liquid:

• EUR/USD (euro / US dollar)
• GBP/USD (pound / US dollar)
• USD/JPY (US dollar / yen)
• USD/CHF (US dollar / Swiss franc)
• USD/CAD (US dollar / Canadian dollar)
• AUD/USD and NZD/USD (Australian and New Zealand dollars)

Who trades the market

Commercial and investment banks, central banks, funds, companies paying or receiving foreign currency, and individual traders. Retail traders make up a small share of total volume.

What moves prices

Many of these events are scheduled and can be followed in the economic calendar.

• Central bank interest rate decisions and their statements
• Macroeconomic data: inflation, employment, GDP growth
• Geopolitical events and shifts in risk sentiment
• Capital flows and demand for safe-haven currencies

The risks you need to know

Trading forex and CFDs is leveraged: it magnifies gains but also losses, which can exceed what you expected. European brokers must publish the percentage of retail clients who lose money, which usually exceeds 70%.

Before risking real money it makes sense to start with a demo account, learn risk management and keep a trading journal.