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Forex Trading and Terminology: A Comprehensive Guide for Beginners

The foreign exchange (forex) market has a daily trading volume of $7.5 trillion and is the largest and most liquid financial market globally. It operates 24 hours a day, five days a week. There are over 170 different currencies available for trading with 10 million forex traders. Thus, forex trading is more popular among investors and brokers.

Forex trading means buying and selling currencies to profit from fluctuations in their value. Traders speculate on the price movement; if they predict correctly, they make a profit. The most popular forex pair is EUR/USD.

However, there is a lot more to know about forex trading if you are interested in starting forex trading. Today, we will talk all about what forex trading is. You will get a clear idea of the currency pairs, along with the risks and benefits of forex trading.

Since the forex market operates 24/5, we will also be talking about the best time to trade. Lastly, get an idea of how you can trade forex and the mistakes to avoid.

Let's talk.

What is Forex and Forex Trading?

Forex trading is also known as foreign exchange or FX trading. It is the process of buying and selling currencies in the global forex market.

The foreign exchange (forex or FX) market is a decentralized and over-the-counter (OTC) marketplace where national currencies are exchanged. Unlike stock markets that operate through centralized exchanges, the forex market functions through brokers, a network of banks and traders. All connected electronically across the globe.

The forex market operates 24 hours per day and five days a week (24/5). It’s one of the busiest markets in the world, with some major financial hubs.

Every day, individuals, companies, and banks trade around $6.6 trillion in the forex market. That’s a huge amount of money changing hands daily. Because of this massive volume, forex is the largest and most liquid market. It stays active due to global trade, business, and financial activity happening around the clock.

Here, traders, also known as currency speculators, profit from fluctuations in exchange rates. The strategy is simple: buy a currency at a low price and sell it at a higher rate.

With the option to trade with leverage, traders can control large positions with a smaller initial investment. Since transactions are handled electronically, there's no physical exchange of actual currencies. Instead, currencies move digitally between parties. Brokers facilitate the platform and tools for the traders to execute and manage Forex trading.

Most importantly, forex is accessible, fast-paced, and heavily influenced by global economic events. This makes it an appealing option for traders worldwide.

Understanding Currency Pairs

In forex trading, you can trade currencies in pairs, like AUD/USD. This is because a currency’s value is always measured against another; it can’t be traded or speculated on by itself. Some of the most popular and commonly traded pairs include (EUR / USD), (USD / JPY), or (GBP / USD).

Each currency pair has two parts: the base currency and the quote currency.

The base currency is listed on the left, and it always equals one unit.
The quote currency is on the right and shows how much you need to buy one unit of the base. Also known as the variable currency.

For example, if EUR/USD is 1.05605, it means one euro equals 1.05605 US dollars. So when trading, you're essentially selling one currency to buy another. The base currency is the one you’re buying or selling. In contrast, your profit or loss is calculated in the quote currency.

Each currency is represented by a three-letter code called an ISO 4217 Currency Code. The first two letters usually refer to the country. And the third letter represents the currency name. These standardized codes make it easy to identify and trade currencies globally.

USD = United States Dollar
GBP = Great British Pound

Different Types of Forex Pairs

There are three different types of forex pairs: major pairs, commodity pairs, and cross pairs.

1. Major Pairs
Major pairs are the most traded currency pairs in the world. They always include the US Dollar (USD) and one other top global currency. These pairs are popular because they have high liquidity, low spreads, and are backed by strong economies.

These are sometimes called "major-minors" or "minor majors", depending on the platform.

Examples of major pairs:

EUR/USD (Euro / US Dollar)
USD/JPY (US Dollar / Japanese Yen)
GBP/USD (British Pound / US Dollar)
USD/CHF (US Dollar / Swiss Franc)

Some traders also include:

AUD/USD (Australian Dollar / US Dollar)
USD/CAD (US Dollar / Canadian Dollar)
NZD/USD (New Zealand Dollar / US Dollar)

2. Commodity Pairs
Commodity pairs are tied to the value of natural resources like oil, gold, or iron. These currencies come from countries that depend heavily on exporting raw materials. Their value often moves with commodity prices.

Popular commodity currency pairs:

AUD/USD (Australian Dollar / US Dollar) – linked to gold and iron ore
USD/CAD (US Dollar / Canadian Dollar) – moves with oil prices
NZD/USD (New Zealand Dollar / US Dollar) – influenced by dairy and agriculture

3. Cross Pairs
Cross-currency pairs are any pairs that do not include the US dollar. They are also known as minor currencies. Traders can directly exchange one non-USD currency for another without converting to USD first. These pairs can be less liquid and have wider spreads.

Examples of cross pairs:

EUR/GBP (Euro / British Pound)
EUR/JPY (Euro / Japanese Yen)
GBP/JPY (British Pound / Japanese Yen)
AUD/JPY (Australian Dollar / Japanese Yen)

Types of Forex Markets

There are five main types of forex markets: spot, forward, futures, options, and swaps. You need to understand each forex market properly because every market behaves differently in terms of pricing, risk, and flexibility. So, when you choose the right one, it will directly impact how well you manage your trades and exposure.

1. Spot Market
The spot market is the most basic type of forex trading. Here, currencies are exchanged instantly at the current exchange rate. It’s called the “right-now” market because trades happen on the spot. There are no delays or future dates. This is where buyers and sellers agree on the price and make the trade right away.

2. Forward Market
In the forward market, two parties agree to trade a set amount of currency at a fixed price on a future date.

These contracts are private deals made outside of exchanges. Businesses and traders use this to lock in prices and protect themselves from currency changes. However, since it's customized, there are risks, such as low liquidity or the other party not following through.

3. Futures Market
Futures markets are like forward markets, but more secure and organized.

Trades happen on official exchanges, so there’s less risk of someone backing out. The contracts are standardized. This means everyone follows the same rules for amount, price, and date. It’s a safer way to trade currencies for a future date.

4. Options Market
In the options market, you get the right to buy or sell a currency at a set price in the future, but you're not forced to do it.

It’s flexible and good for limiting risk. You can choose your price and expiration date. If it doesn't happen, the market doesn’t move in your favor. So you can just let the option expire.

5. Swaps Market
A forex swap is when two parties exchange (or "swap") one currency for another and agree to swap them back later. It’s like borrowing one currency and lending another at the same time. Big banks or institutions use swaps to manage liquidity.

Example of a Forex Trade

Let's say you believe the British pound (GBP) will fall against the Japanese yen (JPY) due to weak UK economic data and rising inflation in Japan.

The current exchange rate is GBP/JPY = 185.00. This means one British pound is worth 185 yen. Assume that you decide to sell the pound by selling £1,000 and converting it to 185,000 yen.

A few days later, the UK releases poor GDP numbers. The exchange rate drops to GBP/JPY = 180.00. Now you decide to close your trade. With your 185,000 yen, you can buy back £1,027.77 (185,000 ÷ 180) and make a £27.77 profit (minus any broker fees).

If the pound had strengthened instead, you'd need more yen to buy back the same £1,000. This would have led to a loss.

Risks & Benefits of Forex Trading

Forex trading offers high flexibility, 24/5 access, low costs, strong liquidity, and the chance to earn big with leverage. But it also comes with high risk, fast market swings, possible big losses from leverage, and a steep learning curve.

Pros of Forex Trading

High liquidity: Easy to enter/exit trades
Open 24/5: Trade any time, day or night
Low cost: Most brokers have tight spreads
Global market: Trade currencies worldwide
Demo accounts: Practice before using real money
Small capital needed: You can start with less
Diverse strategies: Scalping, swing, hedging, etc.

Cons of Forex Trading

High risk: Prices can move quickly and sharply
Leverage risk: Can amplify both gains and losses
Requires knowledge: Not beginner-friendly without learning
Emotional pressure: Fast moves can trigger fear/greed
Volatile: Geopolitics, news, and data can shake the market
Complex analysis needs, both technical & fundamental skills
Not passive: Needs regular monitoring and decisions

Forex Market Sessions

The forex market doesn’t sleep. It just moves around the world. It runs 24 hours a day, five days a week, starting Sunday at 5 p.m. (ET) and closing Friday at 5 p.m. This non-stop action occurs because trading spans multiple time zones across major financial hubs, including Tokyo, London, and New York.

These hubs make up the three main trading sessions:

Asian (Tokyo)
European (London)
North American (New York)

Each session reflects the peak business hours of that region. For example, when Tokyo’s market is open, Asian currencies like the yen see more activity. When London and New York overlap, it's the busiest time of all. However, this is perfect for traders chasing high volatility and volume.

Why does this matter? Because the session you trade in affects the price moves, spreads, and news events you'll face.

Top Overlaps:

London & New York (ET 8 a.m.–12 p.m.) → Most active
Tokyo & London (GMT 8 a.m.–9 a.m.)
Sydney & Tokyo (GMT 12 a.m.–7 a.m.)

How Does Forex Trading Work?

Like CFD trading, you need to predict, but on the currency pairs in forex trading. Forex trading is buying one currency while selling another at the same time, always in pairs like EUR/USD. You make a profit if the currency you bought goes up in value compared to the one you sold. A forex broker facilitates the platform and all other tools with leverage so the traders can trade forex.

Here is a detailed breakdown of how forex trading works.

1. Currency Pairs

Forex trading operates through the exchange of currency pairs. The price of a currency pair shows how much of the quote currency you need to buy one unit of the base currency.

2. Buying, Selling, and Predicting Movement

A forex trade always involves two currencies; you are buying one and selling the other at the same time. For example, if you buy EUR/USD, it means you’re buying euros (the base currency) and selling US dollars (the quote currency).

When you go long on a pair, you expect the base currency to gain strength against the quote currency. You think the price will go up. On the other hand, when you go short, you expect the base to lose value against the quote. This means the price will drop.

These price movements are influenced by things like interest rate decisions, inflation data, political news, or global economic reports. Even a small news update can shake the market.

3. Profiting from Fluctuations

Traders make a profit from forex trading through the difference between the buy (bid) and sell (ask) prices. This difference is known as spread.

When you enter a position and the market moves in the predicted direction, you can close the position at a higher or lower price (depending on the type of trade) to get the price differential. By this, you can make a profit.

4. Leverage

With leverage, you get to trade with a large position and minimal capital. Brokers offer leverage ratios such as 50:1, up to 500:1. Simply put, if you have $1000 with a leverage advantage ratio of 100:1, you can control a position worth $100,000.

So, you get to profit more if you speculate correctly. But a potential loss with a wrong prediction on your forex trading.

5. Risk Management

Due to the high volatility in the currency markets, there is a high risk in forex trading. Daily price fluctuations of major currency pairs range between 50 and 100 pips. But during high-impact news events, such as central bank rate decisions, volatility can exceed 200 pips. So, traders need to maintain strict risk management protocols such as stop-loss orders.

Forex Terminologies

For the new forex traders, you must know the basic forex terminologies that you will come across most often and need to have a good understanding of. You will learn terms like currency pairs, which we have talked about a ton of times; there are margin, spread, and thousands of other terms.

Currency Pairs
A currency pair represents how much one unit of a base currency is worth when exchanged for the quote currency. Forex trading always happens in pairs, where you're buying one currency and selling the other.

Exchange Rate
The exchange rate shows the current price of one unit of the base currency in terms of the quote currency.

If the exchange rate for GBP/USD is 1.25, you need $1.25 to buy £1. Rates change constantly based on demand, economic events, and market sentiment.

Pip (Percentage in Points)
A pip is the smallest price movement in the forex market, usually the 4th decimal place.
For most currency pairs, 1 pip = 0.0001. If EUR/USD moves from 1.1000 to 1.1002, that’s a 2-pip move. Pips are key in measuring profits and losses.

Spread
The spread is the gap between the price you can sell a currency (bid) and the price you can buy it (ask). It’s how brokers earn money without charging a direct fee. For example, if EUR/USD is quoted as 1.1050/1.1052, the spread is 2 pips.

Leverage
Leverage lets you trade larger positions with a smaller amount of capital.

If your leverage is 1:100, $100 can control $10,000. It amplifies both profits and losses, so use it carefully. High leverage = higher risk.

Lot
A lot is the standardized trading size in forex.

1 standard lot = 100,000 units of the base currency. You can also trade mini lots (10,000) and micro lots (1,000). Choosing the right lot size depends on your capital.

Margin
Margin is the amount of money you need to open or maintain a position.

It’s not a fee but a portion of your capital held as collateral. If you're trading with 1:100 leverage, a $1,000 position needs just a $10 margin.

Stop Loss (SL)
A stop-loss automatically closes a trade to limit losses.

If you set an SL 50 pips below your buy entry, your position will close if the market drops that much. It’s an essential part of risk management.

Take Profit (TP)
A take profit automatically closes a trade when your target price is reached.

If you buy EUR/USD at 1.1000 and set a TP at 1.1050, your trade will auto-close with 50 pips profit.

Bull Market
A bull market is when prices are expected to rise or are rising.

In forex, this means the base currency is gaining strength against the quote. For example, EUR/USD going up means EUR is bullish.

Bear Market
A bear market is when prices are expected to fall or are falling.

It indicates weakness in the base currency compared to the quote. If USD/JPY is dropping, USD is bearish relative to JPY.

Common Mistakes Beginners Make

If you are a new forex trader, chances are you may make some mistakes that most beginners make. But worry not, we are highlighting them here so you can be careful from the beginning.

One key point: avoid getting overconfident after a profitable trade. The market can shift instantly, especially when unexpected economic news hits. Let's check some more common mistakes you should avoid.

Trading Without a Plan
Trading isn’t just about opening an account, investing some money, and instantly making profits. If that’s your plan, you’re already heading in the wrong direction. Real trading needs a solid strategy, with proper research, practice, and ongoing learning. You need to constantly educate yourself, test different approaches, and find what truly works for you. And even then, success in trading isn’t fixed; it’s dynamic. What works today might not work tomorrow.

Your trading plan should outline your entry and exit points, preferred currency pairs, risk-reward ratios, and how much capital you're willing to risk per trade. According to research by DailyFX, traders with a structured plan perform up to 30% better over time than those without one.

Not Setting Up a Stop Loss
This risk management strategy can save you from a huge loss if you can use it properly, which most traders ignore.

For example, if you're trading the EUR/USD pair and the market moves 100 pips against your position, that could mean a $1,000 loss on a standard lot (100,000 units). A stop loss protects your capital by automatically closing the trade once a set loss limit is reached.

Trading in Multiple Markets at Once
Beginners often fall into the trap of trading too many currency pairs simultaneously. You may think of it as a way to maximize profits. But it can increase your stress, reduce focus, and amplify risk.

In forex trading, you need to be very attentive to every detail, as different pairs have different volatility, liquidity, and responsiveness to economic news. So, if you stick to one or two pairs, you will be able to learn strategies better and refine them.

Overleveraging
According to the European Securities and Markets Authority (ESMA), between 74% and 89% of retail traders lose money when trading CFDs, often due to excessive leverage.

Leverage can magnify gains and losses. Many brokers offer leverage ratios as high as 1:500, which means you can control a $100,000 position with just $200 in your account. Sounds great, right? Not exactly. While you can make large profits with a small amount, a minor market fluctuation can wipe out your entire capital just as fast.

Overconfidence After Some Profits
After making a few profits, most traders start believing that they have mastered forex trading without realizing that this can lead them to riskier trades. They may try to start with large position sizes and not focus much on consistency. One or two lucky trades don’t validate a strategy.

Statistics show even professional traders aim for a win rate of 55-60% and manage risk carefully on every trade.

Ignoring Economic News
When you are starting forex trading, you must know that this market moves based on global events. So you can not ignore economic calendars and all the major news, which most new traders do.

Central bank decisions (like interest rate changes), inflation reports, employment data (like the U.S. Non-Farm Payroll), and GDP growth announcements all affect currency values. For example, the release of the U.S. CPI (Consumer Price Index) can trigger movements of 50–100 pips in minutes.

Inadequate Risk Management
For successful trading, risk management plays an important role. Beginners often risk too much of their capital on one trade. There is a general rule to risk no more than 1–2% of your total account balance on a single trade. So, if you have a $5,000 account, your maximum risk per trade should be $50 to $100. This keeps your account alive during drawdowns.

Conclusion

For forex trading, especially for newbies, a good understanding of the market, currency pairs, types of forex markets, how the whole process works, and all that. With in-depth knowledge, you can make your forex trading strategy so that there is less risk to your investment, and you get a chance to make a profit.

Today, we have broadly discussed forex trading, which a beginner should know about. Forex trading, where you trade on currency pairs, one known as the base currency and the other as the quote currency. Traders aim to profit from changes in exchange rates.

You profit in forex by buying a currency pair when you expect the base currency to strengthen, then selling it at a higher price. The more the base currency rises against the quote currency, the more profit you make. But if the market moves against you, it can also lead to losses.

Here, a trusted broker gives you the platform, leverage, and tools so you can trade where you can trust FNMarkets. We offer 500:1 leverage to the traders so you can control larger positions. Moreover, with our lower spread and fastest 50 ms execution, you get to trade with the best trading experience.

So, if you are ready to take your first step in forex trading, start with FNmarkets.

FAQ

How do currency markets work?

Currency markets work by trading one currency for another in pairs, based on their exchange rates, which constantly change due to global supply and demand.

Is forex trading halal in Islam?

Forex trading can be halal if done without interest (riba) and speculation (gharar), using swap-free Islamic accounts that follow Shariah principles.