What is Forex Trading? A Practical Guide for Beginners and Aspiring Traders
Written by
| Reviewed by Abdul Latheef K
Last updated on
November 28, 2025
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What is forex trading? You might have encountered this question at least once in your life.
Forex trading, often called FX or foreign exchange, is an over-the-counter global market where currencies are bought, sold, and exchanged. It is the world’s largest financial marketplace, allowing traders to swap one currency for another with the expectation of earning profits from changes in exchange rates.
As per the 2022 report by the Bank for International Settlements, the forex market has an average daily trading volume of about $7.5 trillion, which includes spot, forward, swap, and options transactions.
Traded as currency pairs, some of the most popular currency pairs on forex include EUR/USD, GBP/USD, USD/CAD, USD/JPY, and USD/CHF.
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How Forex Impacts Everyday Life (Real-Life Examples)
Some of you might believe that forex trading is only for professional traders, commercial and central banks, and large financial institutions. However, forex or foreign exchange is a part of our daily lives in multiple ways. Let’s have a look at them.
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A Brief History of Forex Trading
Forex trading traces back thousands of years to the barter system, where goods and services were exchanged directly. Over time, coins and precious metals like gold and silver replaced barter, particularly in the Middle Ages, laying the foundation for currency trade in Europe.
By the 20th century, the Bretton Woods Agreement (1944) pegged global currencies to the US dollar, which was backed by gold. However, the system collapsed in 1971 due to declining gold reserves, allowing currencies to float freely based on supply and demand, marking the start of the modern forex market.
Today, forex is the world’s most liquid financial market, operating 24/5 across global time zones. Advances in technology have further expanded access, with online platforms and brokers enabling participation by both institutions and retail traders.
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Forex vs. Stock Market: Key Differences
Trading can often be confusing. People, especially beginners, get confused between the forex market and the stock market. However, an understanding of these different markets is needed to finalise which best suits individuals.
Here are some of the major differences between the forex and the stock market.
| Forex Market | Stock Market |
|---|---|
| Involves trading with currency pairs (e.g., USD/CAD, EUR/USD, GBP/USD, etc.) | Involves the purchase and sale of ownership stakes in various companies. |
| The market functions continuously, for 24 hours, five days a week, covering all major global time zones. | The market has a restricted time and is not available for 24 hours on all weekdays. |
| The forex market is one of the most liquid financial markets globally. | The stock market generally offers lower liquidity when compared to the forex market. However, large-cap stocks can be highly liquid. |
| Most forex brokers either charge a small commission or build their costs into the spread. Compared to stocks, fees are typically lower. | The stock market has commissions or fees. |
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How Forex Trading Actually Works – Explained Step-by-Step
Understanding how forex trading works will help traders learn more about the forex market and identify potential turns and twists in it. So, in this section, let’s have a detailed discussion on the trading process, forex trading hours, and key participants in forex.
The Trading Process (Buy/Sell in Action)
The process of trading or the buying or selling of currency pairs begins with selecting a currency pair from the available ones. Once the currency pair is finalised, the traders have to decide whether they need to go long or short on the pair.
However, consider using technical tools like charts and indicators, news, and economic data to analyse the market conditions and potential changes in the forex market. Once the market conditions are analysed, it’s time to execute the trade.
The trading process does not end with the trade execution. Traders have to continuously evaluate the market performance of the traded pair and may make adjustments based on its performance.
Finally, the trade can be closed either manually or automatically, as chosen by the trader. Once the trade is closed, the profit or loss of the trade will be reflected on the trader’s account.
Forex Market Hours and Global Sessions
As we have already mentioned, forex allows 24/5 market access. This means the forex market remains active 24 hours a day throughout the weekdays. The overlapping of the time zones of main sessions, such as the US, Asia, and Europe, is the major reason behind this 24-hour availability.
Here is a breakdown of the trading hours of various regions and markets across different time zones.
All these sessions start on Monday morning and end on Friday night according to their local time.
Although investors can trade anytime during these sessions, the London-New York overlap and Tokyo-London overlap are considered the most suitable times for trading, as in the first session, liquidity and volatility will be at their maximum, and in the latter session, activity will be moderate.
Key Forex Participants (Retail, Central Banks, Hedge Funds)
A wide spectrum of participants is involved in the forex market. Some of them include:
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Core Forex Concepts Every Trader Must Know
Before stepping into the world of forex trading, it is important that you are aware of some of the essential forex terminologies. Mastering these terminologies not only helps reduce your confusion regarding forex but also helps you become an informed forex trader.
Here is a further breakdown of some core forex concepts that every trader must know.
Currency Pairs: Majors, Minors, Exotics
Currency pairs are crucial in forex trading, as they are the direct way of trading in the forex market. As the name denotes, a currency pair has two currencies that are used in the foreign exchange market.
In a currency pair, the quote currency is the second specified currency, and the base currency is the first. For instance, the Canadian dollar (CAD) is the quote currency and the US dollar (USD) is the base currency in the USD/CAD pair. In other words, The price shows how much Quote currency (CAD) is needed to buy one unit of the Base currency (USD).
As there are numerous currencies in the world, the number of currency pairs is also numerous. These currency pairs are classified according to how frequently they are traded in the market.
Pips, Lots, Leverage, and Margin – Simplified
The other major forex terms include:
Bid, Ask, and Spread
Have you ever come across terms like ‘bid’, ‘ask’, and ‘spread’ while researching forex trading? What are they? Let’s have a quick look.
Slippage, Swap, and Rollover Explained
There are some other terms that a beginner in Forex should understand before entering real-time trading. They are:
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What Moves the Forex Market?
A number of elements influence the FX market’s overall performance. Let’s examine a few of them briefly.
Economic Indicators (GDP, CPI, NFP, etc.)
Economic indicators such as GDP, CPI, NFP, and others offer insights into the economic condition of a country. A country with strong economic health also offers a strong currency. As a result, these economic indicators have a big influence on how the forex market moves.
Central Banks and Interest Rates
Currency values are directly impacted by the monetary policies set by the central banks of different nations. Along with these policies, the interest rates of the currencies also play a crucial role in determining the popularity of a currency. While the interest rates are higher, more people will be interested in them. So, with changes in the monetary policies of central banks and interest rates, significant changes will be visible in the forex market as well.
Geopolitical Events and Sentiment Analysis
Another major factor that moves the forex market is geopolitical events and sentiment analysis. Political instability caused by wars, elections, riots, disputes, and other causes can seriously impact the global market of the native currencies.
Similarly, beyond proven data and statistics, sentiments can also affect the forex market. Petty rumours, news, social events, and even social media trends can largely impact the market.
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Types of Forex Markets and Instruments
As some of you might know, the forex market is not only about buying and selling currencies. It offers a variety of markets, ranging from the traditional market to forward and futures. Similarly, there are various trading platforms as well as foreign brokers.
Having an understanding of these elements will help traders, especially beginners, learn the differences and identify which suits them the best.
Spot, Forward, Futures, Options
CFDs vs Traditional Forex Trading
Have a quick look at how CFDs differ from traditional forex trading.
| CFD (Contract For Difference) | Traditional forex trading |
|---|---|
| In this case, traders speculate on an asset’s price changes without really owning it. | In this case, trading is carried out by converting one currency into another. The trade is based on this currency pair’s speculative price swings. |
| While CFDs on equities or commodities may be restricted to exchange hours, CFDs on currency typically adhere to the 24-hour FX timetable. | Offers 24/5 market access and global accessibility. |
| Depending on the traded asset, CFD exhibits dramatic fluctuations in liquidity. | With tighter spreads, reduced slippage, and low entry and exit restrictions, forex offers great liquidity. |
| CFD regulations vary from region to region. The rules and regulations in Europe will be different from those in India or other Asian countries. | Forex is a decentralised OTC market. While the market itself is not centrally regulated, brokers are regulated in their respective jurisdictions. |
Forex Trading Platforms (Web, App, MetaTrader, etc.)
Traders need reliable platforms that connect them with regulated brokers and diverse trading options. The various forex trading platforms listed below are designed to meet the various needs of traders.
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How to Start Trading Forex with Confidence
Now that you have got a brief idea of the basics of forex, including what is forex and how does it works, let’s quickly analyse how you can start trading on forex.
Choose a Regulated Forex Broker
Ensure that you choose a regulated broker, licensed and identified by organisations like the FCA, BaFin, ASIC, CFTC, NFA, MAS, and BMA. The transparency, low entry barriers, low transaction costs, diverse trading options, leverage opportunities, capital efficiency, and more of your forex broker play a crucial role in your trading journey.
Open a Demo Account and Practice
Before entering real-time trading, practising with a demo account will help beginners gain practical knowledge in forex trading without risking actual money. It also aids in strategy testing and platform comprehension.
Learn Risk Management (Position Sizing, Stop Loss)
Learning proper risk management features is essential to mitigate potential losses in the future. Setting stop-loss orders and adjusting position sizes will reduce your exposure, helping you keep your trades under control.
Select a Trading Strategy (Day, Swing, Scalping, Position)
Forex has various trading strategies like quick trades or scalping, holding positions for hours or days, also called day or swing trading, or long-term trading, known as position trading. Learn about all these varieties and choose a trading strategy that better suits your needs and interests.
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Common Mistakes New Forex Traders Should Avoid
So far, we have discussed various aspects of forex trading, which might be exciting for you. However, before entering this global forex market, there are some avoidable traps and pitfalls you should be aware of. Here are some of them.
Overleveraging
As many of you might be aware, leverage is a unique feature that helps traders trade large positions with a relatively small margin. However, just like a double-edged sword, this feature has potential risks.
While leverage might offer significant profit in some cases, overleveraging or using excess leverage can lead to unimaginable losses.
So, always ensure that you leverage for smaller amounts that stay within your risk tolerance capacity.
Revenge Trading
Revenge trading is the practice of trading to overcome previous losses. Such trading is mostly driven by emotions rather than rational thinking. Instead of conducting thorough research of the market and its performance, traders will be mostly influenced by their anger, frustration, and emotions.
This revenge trading may lead to further risks and losses instead of making up for the losses.
Ignoring Risk Management
Ignoring the risk management capability is a serious mistake made by many inexperienced traders. While the forex trading excites them in the initial days, most of them only look for potential benefits and ignore checking the losses they might experience once the trade falls.
Therefore, it is crucial for forex traders to use risk management methods such as stop-loss orders, position size, and others, as well as to continuously assess market performance and risk tolerance.
Emotional Trading
Forex trading can often get triggered by emotions, especially among new traders. Although this trading requires proper market analysis, an understanding of risk management and the utilisation of indicators and market trends, people can easily get triggered by an immediate response to losses.
Anger, frustration, and greed can often take up the rational mind and control the trading decisions, sometimes leading to unimaginable losses.
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Benefits and Risks of Forex Trading
Similar to any other financial platform and procedure, forex trading also comes with certain benefits and drawbacks. A broad understanding of these benefits and risks is essential to excel in this field.
So, let us also discuss the benefits of forex trading and the risks that might follow.Â
Why People Choose Forex
From 24/5 trading hours to improved volatility and other benefits, various factors attract people towards forex trading. Some of the major factors that make forex an attractive option for traders are:
Hidden Risks New Traders Overlook
Here are some of the risks that new traders might often overlook. In order to stay clear of them during your trading journey, have a look at them.
How to Balance Risk and Opportunity
Focusing on the benefits or avoiding risks is not the only factor that helps reap success from forex. It is mainly about finding a balance between the risks and the opportunities. But how do you do that? Here’s a short list:
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Can Forex Trading Be a Source of Passive Income?
Have you come across people or organisations advertising forex trading as a good source of passive income? Is trading really a source of passive income?
Even though forex trading allows you to use automated tools and various platforms that help reduce your direct involvement in trading, forex requires continuous monitoring and involvement, making it more of a semi-passive income source.
What Passive Income Really Means in Forex Trading
A passive income is an income or earnings generated through minimal to no active involvement after the initial setup. Like dividends and rentals, individuals do not have to put effort into maintaining this source of income.
Being a highly volatile environment that requires consistent analysis, proper research and continuous monitoring, forex trading cannot be considered a true source of passive income. However, as it includes automated services and bots, forex can be considered a semi-passive income generation method.
Automated Trading Bots and Expert Advisors (EAs)
Forex brokers and platforms like MetaTrader offer automated trading bots and expert advisors. These features help automate forex trading to a certain extent by aiding algorithm research, market condition analysis, and more.
As these bots and services live throughout the day without human intervention, many people get attracted to these services, thinking that forex trading can also be maintained as a passive income source.
However, these facilities are not foolproof. They can also be affected by sudden market changes. Furthermore, the risk management techniques and the pre-planned plans may occasionally not work.
So, although automated, these services also require constant monitoring and analysis to prevent heavy losses. Replacing manual analysis completely with these bots is not a good trading practice.
Copy Trading and Social Trading Platform
While social trading platforms are networks or communities of traders to share ideas, strategies, price changes, and market sentiments, copy trading is a strategy that allows a trader to copy the trading positions taken by another trader.
To a certain degree, both of these systems aid with trading automation, particularly copy trading. Copy trading is more like imitating someone else’s transactions.
Although these facilities ease trading and automate it to a certain extent, making it feel like a passive source, selecting the right trader to follow is crucial. Moreover, these facilities do not guarantee risk-free trading, confirming the need for regular monitoring.
Forex Affiliate and Referral Programs
Affiliate and referral programmes are certain methods that are close to passive earnings in forex trading. Once you develop an audience and promote forex trading services to them through your affiliate programmes, you can earn continuous earnings whenever a new trader joins the programme you promoted.
Moreover, most brokers offer referral money to you if new traders join their community through your referral links. So, these are some of the less risky and passive forms of income you can generate from forex trading.
However, as this is an easy way to gain money, chances are high that people fall for false claims. So, always be careful and thoroughly analyse the broker before finalising, as it helps avoid scams and fraud. Additionally, make sure that you do not promote risky and unregulated offshore brokers for referral earnings.
Position Trading: A Semi-Passive Strategy
Long-term trading is a type of position trading. Here, traders hold positions for months or years. Position trading is a semi-passive technique since it is a long-term policy with little to no daily interventions.
However, the fundamental changes in monetary policies by central banks, geopolitical scenarios, and other external factors will affect position trading as well. Therefore, it also requires repeated monitoring and frequent market analysis. So, position trading can only be considered as a semi-passive source and not completely passive.
Risks and Limitations of Passive Forex Income
Considering forex trading as a source of passive income comes with inherent risks and limitations. The volatility and unpredictability of the market show how risky it is to engage in trading completely using automated services and bots.
Moreover, over-reliance on social trading and copy trading platforms can also be risky, as copying others and not investing your time and research while trading can lead to heavy risks and losses.
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Forex Learning Resources for Traders
Forex trading is a rapidly evolving marketplace. So, continuous learning is essential to excel in this field. But how do you learn forex trading? From online courses and eBooks to webinars and demo accounts, you have a wide range of opportunities to learn and excel in forex trading.
Free Courses, eBooks, and Webinars
These resources will help you learn the basics of forex trading and grasp important concepts at your own pace. Various online platforms like these provide such educational resources that help you easily learn forex trading.
Tools for Charting and Analysis
Using the charting facilities, analysis tools, and indicators will help understand the current performance of the market and make informed decisions to reduce losses.
Communities and Forums for Peer Learning
You can find various online communities and forums of like-minded traders. These communities will help interact with similar people and learn from their experiences, losses, and strategies.
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Final Thoughts
By now, you might have got a clear idea of what is forex trading and how beginners can approach it with confidence. As we have discussed so far, forex trading offers a vast array of opportunities for both beginners and experts. However, it is our responsibility to use them wisely by mitigating the inherent risks.
So, at first, thoroughly research this financial landscape and stay aware of basic concepts and important terminologies such as pip, leverage, slippage, lot size, and more. Similarly, practice trading and experiment with your strategies using demo accounts, and shift to real-time trading once you feel confident.
Always stay within your risk tolerance capacity and never compromise on your risk management. Slow and steady trading with smart strategies will help you earn profits from this field.
However, falling for your emotions and engaging in revenge trading can always lead you to heavy losses. So, always stay within your limits and continuously update yourself on the market trends, new strategies, and market performance, as it will help you reap more success in forex trading.
Author Info
Uma Nair is a professional content writer with over 3 years of experience and a strong foundation in crafting engaging and informative content across diverse domains. Over the years, she has dealt with various niches, and her growing interest in finance has led her to explore the world of financial writing. As an English Language and Literature postgraduate, her educational background supports her ability to convey complex topics in easy and accessible content. In her free time, she stays updated on industry trends to continually enhance the value of her content.
Reviewed by
Abdul Latheef K is a Researcher at Jawaharlal Nehru University, New Delhi. He is also an Author, Educator, and Expert in personal finance and Investment. His areas of interest comprise the Stock Market, foreign capital flows, and Open Economy Macroeconomics.
Disclaimer:
The information provided on this blog is for general informational and educational purposes only and is not intended as financial, investment, legal, or tax advice. While we strive to ensure accuracy, completeness, and timeliness, the financial world is dynamic, and content may become outdated or subject to change. Always conduct your own research or consult with a qualified financial advisor before making any investment or financial decisions. The authors and publishers of this blog are not liable for any losses or damages arising from the use or reliance on the information presented.
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