Forex is a term that many have heard, but few truly understand. You might have unknowingly participated in Forex trading if you’ve ever exchanged currency while traveling abroad. But have you ever thought about what Forex really entails?

In this article, we’ll explore the essentials of Forex trading—covering key terms every trader should know, different types of Forex pairs, and much more. If you’re curious about the world’s largest financial market, keep reading.

What Is Forex?

At its core, Foreign Exchange (Forex or FX) involves trading one currency for another. However, its significance extends far beyond simple currency exchange. The Forex market is the largest and most liquid financial market in the world, with daily trading volumes surpassing trillions of dollars (as of November 2023), making it one of the most actively traded markets globally.

Who Participates in the Forex Market?

In addition to individual investors and traders, several major players actively engage in the Forex market:

Central Banks

Institutions like the Federal Reserve, the Bank of England, and the People’s Bank of China play a crucial role in shaping currency values. By setting interest rates and implementing monetary policies, central banks influence exchange rates and intervene in the Forex market to stabilize their national economies.

Multinational Corporations

Global companies participate in Forex trading to manage risks associated with currency fluctuations. When conducting international transactions, these corporations exchange currencies to protect their profits and investments from the volatility of foreign exchange rates.

Banks and Financial Institutions

Commercial and investment banks are at the heart of Forex trading. They facilitate transactions for clients, profit from bid-ask spreads, engage in speculative trading, and offer diversified investment opportunities.

Why Trade Forex?

Forex trading serves several key purposes, including:

Speculation

Forex markets are driven by a variety of factors, such as interest rates and geopolitical events. Traders can speculate on currency fluctuations, aiming to profit from market volatility.

Hedging

Hedging is a strategy used to minimize the risk of adverse price movements. For businesses that deal with international transactions, Forex trading can be a useful tool to lock in exchange rates and protect against potential losses caused by currency fluctuations.

Types of Forex Markets

There are six primary types of Forex markets:

  • Spot Market: The immediate exchange of currencies at the current market price, typically settled within two days (T+2). Central and commercial banks, as well as dealers, are the main participants in this market.
  • Forward Market: A contract to buy or sell a specific amount of currency at a future date, for a predetermined price. This market is commonly used for hedging against future exchange rate fluctuations.
  • Futures Market: Unlike the spot market, futures contracts are legally binding agreements to buy or sell currency at a set price on a specific future date. These contracts are highly liquid and traded on exchanges.
  • Swap Market: This involves the simultaneous purchase and sale of currency pairs, where participants exchange equivalent amounts of different currencies.
  • Options Market: Options contracts give traders the right (but not the obligation) to buy or sell a currency pair at a set price. Options allow traders to manage risk and make strategic bets on currency movements.
  • CFDs Market: A Contract for Difference (CFD) is an agreement between a buyer and a seller, or a client and a provider like PFD Markets, to settle the difference in value between the opening and closing prices of a currency. CFDs allow traders to profit from both rising and falling markets.

Where Can I Trade Forex CFDs?

If you’re interested in leveraged trading*, PFD Markets offers a robust platform for trading Forex CFDs.

On PFD Markets, traders can access over 60 Forex pairs and a wide range of financial instruments. The platform provides an intuitive interface, and you can explore educational materials, including Trader’s Guide videos, to better understand CFD trading.

*Note: Leveraged trading carries a higher level of risk if the market moves against you.

When Can I Trade Forex?

Forex markets operate 24 hours a day, 5 days a week. PFD Markets offers 24-hour access to Forex CFD trading, starting at 08:00 Sydney time on Monday and closing at 16:00 New York time on Friday.

Types of Forex Currency Pairs

As previously mentioned, Forex involves trading currency pairs, which can be defined as the simultaneous purchase of one currency against another. Forex trading primarily occurs on the over-the-counter (OTC) market, though it is also available on futures exchanges.

Currency pairs typically fall into three main categories: Majors, Minors, and Exotics.

Majors

Major currency pairs are the most traded globally, which is why they are called “Majors.” These pairs generally offer the highest liquidity and usually involve the U.S. Dollar (USD) or the Euro (EUR) being traded against other major currencies, such as:

  • British Pound (GBP)
  • Swiss Franc (CHF)
  • Japanese Yen (JPY)
  • Canadian Dollar (CAD)
  • Australian Dollar (AUD)
  • New Zealand Dollar (NZD)

Some of the most-traded Major currency pairs include EUR/USD, AUD/USD, and USD/CAD.

Minors

Minor currency pairs generally have lower liquidity than Major pairs. Examples of Minor pairs include:

  • AUD/JPY
  • GBP/CAD

Exotics

Exotic pairs are considered the least traded and typically involve currencies from emerging or smaller economies. These pairs are generally harder to trade due to their volatility and lower liquidity. An example of an Exotic pair is GBP/SEK (British Pound to Swedish Krona).

Forex movements can reflect a variety of fundamentals, including economic growth, international trade flows, and changes in interest rates.

How to Read a Currency Pair

Despite its popularity and liquidity, the Forex market can seem intimidating to newcomers. Understanding how to read a currency pair is essential for making informed trading decisions.

When trading Forex pairs, you’re essentially buying one currency and selling another. The first currency is referred to as the Base currency, and the second currency is called the Quote currency.

For example, if you were to buy the EUR/USD currency pair, you are buying euros while simultaneously selling U.S. dollars. If the euro strengthens against the dollar, you would make a profit. However, if the euro weakens against the dollar, you would incur a loss.

The exchange rate reflects the value of the base currency in relation to the quote currency. So, if EUR/USD is trading at 1.1322, it means that 1,000 euros can be exchanged for 1,132.20 U.S. dollars.

In simpler terms, when trading the EUR/USD, you’re asking, “How many U.S. dollars does it take to buy 1 euro?” Similarly, with EUR/JPY, you’re asking, “How many Japanese yen does it take to buy 1 euro?”

Key Forex Definitions

As we’ve discussed, it’s important to familiarize yourself with the basics of Forex trading. The Forex market is vast, and it’s impossible to cover every term in a single article. However, here are some key definitions you should understand when trading online:

  • Pip: The smallest price movement in a currency pair.
  • Spread: The difference between the buy (Bid) and sell (Ask) price of a currency pair.
  • Leverage: This allows you to trade larger amounts with less capital, meaning that potential profits or losses are amplified. For example, a leverage of 1:50 means you only need $200 to place a $10,000 trade.
  • Exchange Rate: The value of the base currency relative to the quote currency.
  • Bid: The price at which the market maker or broker is willing to buy the currency pair.
  • Ask: The price at which the trader is willing to sell the currency pair. The Ask price is typically higher than the Bid price.

To learn more about popular Forex terminology, check out our article, “Popular Forex Terms You Should Know”.

Trade Forex CFDs with PFD Markets

For traders interested in leveraging Forex market movements, PFD Markets provides a robust trading platform. You can trade Forex CFDs on over 60 currency pairs, along with various other financial instruments.

Learn more about CFD trading on PFD Markets and watch our educational videos to get started.

Popular Forex Trading Pairs & Examples

The majority of Forex trading is priced against the U.S. Dollar (USD), which has long been regarded as the world’s primary base currency. As previously mentioned, all Major Currency Pairs (or Majors) are traded against the USD and are typically considered the most popular pairs in the market. Additionally, many Cross-Currency Pairs (or Crosses) also see substantial trading volume, including EUR/CHF, EUR/GBP, and AUD/JPY, to name a few.

In general, the most actively traded currency pairs include:

EUR/USD

This is the most widely traded currency pair in the world, with the highest volume and deepest liquidity. The EUR/USD pair is often referred to as the “Fibre,” a nickname that emerged when the Euro was first launched.

GBP/USD

This is a popular and highly liquid currency pair, but it tends to be more volatile than the EUR/USD. Recent volatility in GBP/USD has been largely due to the economic uncertainty surrounding “Brexit” (Britain’s exit from the EU). This pair is also known as “Cable,” a term that dates back to the mid-19th century when the USD and GBP were exchanged via a transatlantic cable.

USD/JPY

The USD/JPY is the second most traded pair by volume, behind the EUR/USD. It experiences significant trading volume due to Japan’s large economy and its role in global trade. The JPY is also influenced by economic and geopolitical conditions in the wider Asian region. This pair is colloquially called the “Ninja,” a reference to Japan, where the Yen originated.

Cross-Currency Pairs

Crosses are currency pairs that do not involve the USD, such as EUR/GBP, AUD/NZD, and EUR/CHF. These pairs are popular among traders who wish to trade two non-USD currencies. Exotics are currency pairs that involve a major currency paired with a smaller or less liquid currency, such as GBP/NOK (British Pound to Norwegian Krone) or USD/MXN (US Dollar to Mexican Peso).

To explore more major Forex pairs, check out our article on “Most Popular Forex Pairs“.

How to Choose the Best Currency Pair to Trade?

The Forex market offers a wide variety of currency pairs to choose from, which can help diversify your trading portfolio. However, the abundance of choices can sometimes feel overwhelming. To make a more informed decision, consider the following tips when choosing a currency pair to trade:

  • Look at historical trends: Review past movements of the currency pairs to get a sense of their potential future behavior. While past performance is not necessarily indicative of future results, it can help shape your trading strategy.
  • Test with a demo account: Practice your strategy with popular FX pairs or trade your local currency against the USD on our free, unlimited demo account. Track trends and movements to better understand how the pair behaves over time.
  • Start small: Be cautious and start with small trades to observe market behavior over time before making larger investments.

PFD Markets offers CFD trading on the world’s leading currency pairs. Our intuitive and user-friendly platform includes a free demo account, a range of educational resources, and powerful trading tools designed for both new and experienced traders. We offer some of the lowest spreads in the industry, without compromising on advanced analytics and sophisticated trading options.

Forex FAQs

How does Forex trading work?

Forex trading involves speculating on currency price movements in an effort to profit from changes in the exchange rates between two currencies. Traders buy one currency and sell another simultaneously, depending on their prediction of how the exchange rate will move.

What is the difference between Forex and stock trading?

The primary difference between Forex and stock trading is that Forex deals with foreign currencies, whereas stock trading involves buying and selling shares of companies. Additionally, Forex markets are open 24 hours a day, five days a week, while stock markets operate during specific hours depending on the stock exchange. Forex markets are also considered more liquid and less volatile compared to the stock market.

How can I manage risk in Forex trading?

Risk management in Forex trading is crucial. To manage risk effectively, it’s important to understand the market’s nuances. You should develop a trading plan that aligns with your financial goals and risk tolerance. In addition, using risk management tools like stop-loss orders can help protect your capital. PFD Markets offers free tools to help mitigate risk and manage your trades more effectively.

How can I start trading Forex?

To start trading Forex CFDs with PFD Markets, simply open a trading account. Then, log into your account, select the Forex category on the platform, or search for the currency pair you want to trade. After that, open a buy or sell position based on your predictions and goals.

What is leverage in Forex?

Leverage allows you to control a larger position with a smaller initial investment. While it can magnify potential profits, it can also amplify losses if the market moves against your position. Leverage is a powerful tool that should be used with caution. Learn more about leveraged trading in our “What Does Leverage Mean?” FAQ.