What Is Forex Trading? How the Currency Market Works

Forex (foreign exchange, or FX) trading is the buying of one currency while selling another, in the hope that the exchange rate between them moves in your favour. It is the largest financial market in the world, open 24 hours a day on weekdays, and it runs through a network of banks and brokers rather than a single exchange. For a beginner, the key fact is that every trade is a bet on one currency against another, usually made with borrowed money (leverage), which makes both gains and losses larger.

Currencies always trade in pairs

You cannot simply "buy the dollar". You buy it with something, so every price is a pair. If EUR/USD is quoted at 1.1000, one euro costs 1.10 US dollars.

• Buying EUR/USD means buying euros and selling dollars. You profit if the euro rises against the dollar.
• Selling EUR/USD means selling euros and buying dollars. You profit if the euro falls against the dollar.

Selling first (going "short") is as normal in forex as buying first, because you are always long one currency and short the other. We cover pairs in detail in Currency Pairs Explained.

How big is the forex market?

The Bank for International Settlements (BIS), the central banks' own bank, surveys the market every three years. Its April 2025 survey put average turnover at about 9.6 trillion US dollars a day, up from about 7.5 trillion in 2022. The US dollar was on one side of almost nine in ten trades. Most of that volume is not spot buying and selling by individuals: it is swaps and forwards between banks, funds and companies.

Size matters for you in one way: the major pairs are very liquid, so the cost of trading them (the spread) is usually small. It does not mean the market is easy to beat. A deep market is full of professionals.

Who trades currencies?

Participant	Why they trade
Central banks	Manage reserves, sometimes intervene to slow a currency's move
Commercial and investment banks	Make markets for clients and trade for themselves; the "interbank" market
Companies	Pay suppliers, receive export income, hedge future payments
Asset managers and pension funds	Buy foreign shares and bonds, hedge currency risk
Hedge funds and trading firms	Speculate on rates, trends and macro events
Retail traders	Speculate through online brokers, usually with leverage

Retail traders are a small slice of the whole. Prices are set mostly by the big flows above them, so your job is to read those flows, not to move the market.

Spot, forwards, futures and CFDs

The "forex market" covers several products:

• Spot: exchange at today's rate, normally settled two business days later.
• Forwards and swaps: agree a rate today for exchange on a later date. Companies use these to hedge.
• Futures: standard currency contracts on an exchange such as the CME in Chicago, with a central clearing house.
• CFDs and rolling spot: what most online brokers offer to individuals. You never receive the currency; the broker pays or charges you the change in price, and rolls the position overnight for a small interest charge or credit called a swap (see Swaps, Rollover and the Carry Trade).

When people say "forex trading" online, they almost always mean the last kind: leveraged CFDs or rolling spot with a broker.

How a retail trader makes or loses money

Your profit or loss is simply the price change multiplied by the size of your position, minus costs:

Profit or loss = (exit price − entry price) × position size − spread − commission ± swap

For a short trade, swap the order of the prices. The price change in forex is usually small, often under 1% in a day for the major pairs, so brokers let you control a large position with a small deposit called margin. That is leverage, and it is the single biggest reason beginners lose money quickly. We will put numbers on it in Forex Leverage and Margin.

What moves exchange rates?

Over the long run, currencies follow interest rates, inflation, growth and trade flows. In the short run, they react to central bank decisions, economic data releases and shifts in risk appetite. The US dollar tends to dominate because it is the world's main reserve and trade currency. You will learn these drivers in the "What Moves Currencies" section, starting with Interest Rates and Central Banks.

Forex for readers in Pakistan

The Pakistani rupee (PKR) is not a currency that online brokers normally offer to trade, and the State Bank of Pakistan (SBP) sets the rules on how residents may hold foreign currency and send money abroad. Many Pakistani traders use foreign brokers, but whether and how a resident may fund such an account is a legal question that has changed over time. Check the current rules of the SBP and the Securities and Exchange Commission of Pakistan (SECP) before you deposit anything, and get qualified advice if you are unsure. We return to this in How to Choose a Forex Broker.

Is forex trading worth learning?

Understanding currencies is useful even if you never trade: the dollar affects fuel prices, import costs, crypto and stock markets. Trading them for profit is a different matter. Retail forex is competitive, costs add up, and leverage punishes mistakes fast. This course does not promise you profits. It aims to give you the knowledge to avoid the common, expensive mistakes, to test ideas with evidence, and to decide for yourself whether trading is for you.