Forex Basics For Beginners: How Forex Trading Works

As a beginner or a novice in the forex business, I know that the first question on your mind is: “What is forex?”

Forex is the largest financial market in the world, where currencies are exchanged from one country’s currency to another using the exchange rate.

For instance, if you have your local currency and you want to buy something in another country, or you want to send money to your loved ones abroad, you will first need to convert your local currency into the currency of that country. By doing so, you have just participated in the forex market.

For currency exchange to be successful, you need to go to a bank or a trusted currency vendor in your region. The bank or vendor will then exchange your currency for your desired currency using the current exchange rate.

What is an exchange rate, you may ask?

The exchange rate simply means the value of one country’s currency in relation to another country’s currency. It tells you how much of your local currency is required to get one unit of the other country’s currency.

For instance, if you hold South African Rands as your local currency and want to exchange them for United States Dollars, the amount of Rands needed to get 1 US Dollar is called the exchange rate.

As a beginner who wants to trade forex, you may also be asking: “What is forex trading?”

Forex trading, in simple terms, means buying a currency when the exchange rate is low and hoping to sell when the exchange rate goes up.

When you buy certain units (amounts) of a currency at a cheaper rate and then sell it at a higher rate to make a profit, you have just traded forex.

For example, it costs you 1,804 Rands to buy 100 Dollars when the exchange rate is low. After a short while, the Dollar exchange rate rises, and you sell those 100 Dollars at 2,500 Rands; you’ve just made a 696 Rands profit on that trade.

But if the rate continues to fall instead of rising as you hoped, you will lose money. That is what forex trading is all about.

Who participates in the forex market?

The foreign exchange market, also known as “forex” or “FX,” is the largest financial market in the world. It has the highest number of participants globally, making it a decentralized market where the world’s currencies are exchanged.

Participants in the forex market include central banks, hedge funds, individual traders, and other large financial institutions.

The forex market is traded massively, up to $7.5 TRILLION in daily trade volume. It is open 24 hours a day, five days a week (Monday to Friday). The forex market also operates in sessions, like morning and night shifts. It opens on Sunday 9.00 pm with Sydney session.

There are four trading sessions in the forex market: London, New York, Sydney, and Tokyo.

The table below shows the four trading sessions and their opening and closing times in UTC.

In the next lesson, we will dive deeper into “what is being traded in the Forex market.”

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