What is Forex and How Does it Work?

Understanding forex trading
Forex or foreign exchange is the conversion of one currency to another. For example, you have US dollars (USD) and you want to convert it into Euros (EUR), you will sell USD or buy EUR. If you have EUR and want to convert it into USD, you would sell EUR or buy USD. Whenever you are exchanging your currency into a foreign currency or vice versa, you are participating in the global forex trading. The foreign exchange market is a global decentralized market for buying, selling and exchanging currencies at current or determined prices.

In the context of global Forex trade, the demand for a currency with respect to other currencies would always go up or down. Forex is a heavily traded market because people, businesses and even countries participate in Forex trading. The change in the price of currency may not be substantial but there is a constant up and down movement in their prices all the time. This forms the basis of online Forex trading, where a live chat on your computer screen tracks the price movements of major currencies. Here, you can buy and sell foreign currencies in a 24×7 online trading environment and market profit. This is called Forex trading.

Below is example of forex price chart:
forex chart

What to know about forex?
Currency Pairs
By now, you must have understood that in Forex trading, there are always two currencies involved; they are called pairs.
As currencies are traded 24 hours around the globe, the price of a currency pair keeps fluctuating.

Market Pricing

To understand how to calculate your profit in a market where the change in price occurs in the 3rd and 4th decimal places, you need to be aware of how the industry works with such small changes. Typically, a currency pair will change from 50 to 150 pips, sometimes even more or less. Pip is the short form of Point in Percentage and it denotes the 4th decimal place of a currency pair’s price. In the case of the Japanese Yen, it will indicate the 2nd decimal place. When EUR/USD changes from 1.3 to 1.31, the movement is 100 pips. If that is the rate you bought and sold EUR, you have made a profit of 100 pips. Subject to the number of units involved in the trade, your profit could be $10 for 1,000 units, $1000 for 10,000 units, and $1000 for 100,000 units. Learn more about pips in trading and how to calculate pip value.

Using a demo account

For a better understanding of what pairs signify, how price movements take place, how trading is done, and how profit is earned and transferred to your bank account, working with a demo account (download for free mt4 demo platform to practice trading), also called a paper account, is a good idea. Most online Forex trading platforms offer demo accounts for beginners to learn the basics of the trade before they can start full-fledged trading. You should use the opportunity and improve your knowledge of forex trade and also hone your trading skills.

Final Thoughts

What is forex trading? Forex trading is an extremely popular form of trading and unlike others, learning the basics of the trade is not difficult or complicated at all. On this website, you can read everything you need to know about forex trading.



Igor has been a trader since 2007. Currently, Igor works for several prop trading companies. He is an expert in financial niche, long-term trading, and weekly technical levels. The primary field of Igor's research is the application of machine learning in algorithmic trading. Education: Computer Engineering and Ph.D. in machine learning. Igor regularly publishes trading-related videos on the Fxigor Youtube channel. To contact Igor write on: igor@forex.in.rs

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