Forex: Everything You Need to Know About the Foreign Exchange Market

The foreign exchange market, also known as Forex, is the largest financial market in the world. Whether you simply want to understand it as a whole or are considering investing your money in it, this article provides all the information you need.

Key takeaways:

• The Forex (Foreign Exchange) market is a decentralised platform where currencies from different countries are exchanged. Operating 24 hours a day from Monday to Friday, it reaches a daily trading volume of around $6 trillion, making it the most liquid market in the world.
• Forex transactions are carried out via electronic networks, with no central physical location. The main participants include commercial and investment banks, central banks, financial institutions, businesses, and individual traders.
• Currencies are traded in pairs, such as EUR/USD (euro against US dollar) or GBP/AUD (pound sterling against Australian dollar). Exchange rates between these pairs fluctuate according to supply and demand in the market.
• Central banks intervene in the Forex market to implement monetary policy, stabilise their national currency, and influence exchange rates—primarily by buying or selling currencies.
• Thanks to online trading platforms, individual investors can now access the Forex market, whether for personal use or investment purposes. However, it is essential to have a solid understanding of the associated risks before getting involved.

Forex is a contraction of the words “Foreign” and “Exchange,” and refers to the global decentralised market where currencies of different countries are traded.

Currencies are bought and sold according to an agreed rate, called the exchange rate. Open 24 hours a day from Monday to Friday, the Forex market is described as “decentralised” because it does not have a physical location. Transactions take place electronically. With a daily trading volume of around 6 trillion US dollars, it is the largest financial market in the world.

Several players interact on the Forex market, including:

• Commercial and investment banks: These are the dominant players in terms of volume. They trade on behalf of clients as well as for their own accounts.

• Central banks: They intervene in Forex to stabilise their national currency and implement monetary policy. They buy and sell currencies to influence exchange rates and combat inflation or deflation.

• Financial institutions: Investment funds, currency exchange bureaux, insurance companies, pension funds, and asset management firms are also active on Forex.

• Businesses: Companies participate in Forex to convert currencies related to import and export operations.

• Individuals: These can be traders using online platforms, individual investors, or students, for example.

Currencies are exchanged in pairs as follows:

• EUR/USD: exchanging euros for US dollars

• GBP/AUD: exchanging British pounds for Australian dollars

• And so on.

Trading refers to the activity of buying and selling financial assets with the goal of making a profit from price fluctuations. These assets can include stocks, currencies, commodities, or cryptocurrencies.

Forex is one of several markets where trading can take place.

In other words, trading is an activity, and Forex is a market where traders operate.

Trading on the foreign exchange market can be profitable, but it involves significant risks, for several reasons:

• High leverage: Up to 1:30 for retail traders in Europe, but it can be even higher elsewhere.

• High volatility: Currency values change rapidly due to economic developments and political decisions. Predicting market trends, especially in the short term, is very difficult.

• Psychological challenges: Mistakes are common, and psychological risks abound (overtrading, difficulty accepting losses, poor emotion management, revenge trading, etc.)

• Misinformation traps: Many beginners enter Forex without proper training, and misleading information on the internet often leads to rapid and substantial losses.

Therefore, a solid understanding of how Forex works, many years of experience, and excellent risk management are essential to succeed in this market.

If you want to start trading on Forex, you will need discipline, strategy, and patience.

Start by seriously educating yourself to maximise your chances of success. You can easily find reliable books and courses covering technical analysis, fundamental analysis, and risk management. Be wary of misleading online content — make sure to select trustworthy sources for your education.

It is also crucial to develop a clear strategy to generate profits on Forex.

There are several well-known strategies, each suited to different goals:

• Scalping: Very short-term trades (a few seconds or minutes). The aim is to make small, repeated gains by buying and selling currencies quickly. This strategy carries low risk due to the small potential losses.

• Day trading: Trades last from several minutes up to a few hours but close within the same trading day. This strategy offers some risk control but requires intense focus due to the stress involved.

• Swing trading: A medium-term approach lasting several days or weeks. Risks are somewhat higher, but it is less stressful than scalping or day trading, aiming for larger gains.

• Position trading: A long-term strategy where positions are held for weeks, months, or years. The goal is to capture macroeconomic trends for significant profits.

Good risk management is essential for success in Forex. As mentioned earlier, the market is highly volatile, making it very difficult to predict exchange rate movements.

Experience is usually what makes the difference. Before risking real money, take advantage of demo accounts available online to test strategies and deepen your understanding of market dynamics. This helps avoid real financial losses, reduces stress, and allows you to correct mistakes.

Whatever your goals, keep in mind that trading on Forex carries significant risks: generally, it is estimated that 70% of retail traders lose money. Beware of false promises and make sure to practice before risking your capital.