Everything you need to know about forex trading
Everything you need to know about forex trading
Smartfxbrokers | 7 min read
Published By Smart Securities & Commodities | July 1 2025 |
The foreign exchange market, often referred to as forex or FX, is a global platform where individuals and institutions trade currencies and currency derivatives. Forex trading involves the exchange of currencies, essentially meaning that it is about buying one currency while simultaneously selling another. This dynamic marketplace operates 24 hours a day, allowing traders to capitalize on fluctuations in currency values across different time zones. As a result, forex trading presents opportunities for profit, but it also requires knowledge and strategy to navigate effectively.
When trading forex at Smartfx, you have access to a variety of forex products to suit your trading strategy. Here’s a closer look at the different forex products available:
FX Spot: The FX spot market is designed for immediate currency trades. The term “spot” indicates that transactions typically settle two business days after the trade date, known as T + 2. At Smart, open FX spot positions are rolled forward to the next business day at the end of a trading session, rather than settling immediately.
FX Forwards: FX forwards allow traders to lock in a rate today for an exchange that will occur at a future date. This market is useful for individuals or businesses wanting to manage exchange rate risk by agreeing on a price now for a currency exchange that will happen later.
FX Options: FX options provide the buyer with the right, but not the obligation, to trade currencies at a predetermined price on a specified date in the future. This product can be employed for various strategies, including taking a view on currency pair movements or speculating on future market volatility.
Understanding these forex products helps traders select the right instrument that aligns with their goals and risk management strategies. Whether you prefer immediate trades or are looking to hedge future currency risks, these options offer flexibility to meet diverse trading needs.
How Does Forex Trading Work?
Forex trading operates similarly to other financial transactions, where one asset is exchanged for another. In the forex market, every transaction involves currency pairs, such as EUR/USD or GBP/JPY. The price of a currency pair indicates how much of the quoted currency is needed to purchase one unit of the base currency. For example, if the EUR/USD pair is priced at 1.20, it means that 1.20 USD is required to buy 1 Euro.
In forex, currencies are represented by three-letter codes established by the International Organization for Standardization (ISO). These codes help traders easily identify and differentiate between currencies when analyzing market movements.
When a trader decides to buy a currency pair, they anticipate that the price will rise, indicating that the base currency (the first currency in the pair) is strengthening relative to the quoted currency (the second currency). Conversely, if a trader sells a currency pair, they expect the price to decline, suggesting that the base currency is weakening against the quoted currency.
To be successful in forex trading, it’s crucial to have a solid understanding of currency pairs and their dynamics. Familiarizing yourself with the most popular currency pairs and how they behave can significantly enhance your trading strategy. With the right knowledge, you can better align your trades with your financial goals.
The major currency pairs (or majors) include:
EUR/USD (Euro/US dollar)
Nickname: Fiber
USD/JPY (US dollar/Japanese yen)
Nickname: Gopher
GBP/USD (Pound/US dollar)
Nickname: Cable
USD/CHF (US dollar/Swiss franc)
Nickname: Swissie
AUD/USD (Australian dollar/US dollar)
Nickname: Aussie
USD/CAD (US dollar/Canadian dollar)
Nickname: Loonie
EUR/JPY (Euro/Japanese yen)
Nickname: Yuppy
EUR/GBP (Euro/pound)
Nickname: Chunnel
XAU/USD (Gold/US dollar)
Nickname: Gold forex
In the context of forex trading, spreads and pips are fundamental concepts that every trader should understand.
Spreads refer to the difference between the bid price (the price you can sell at) and the ask price (the price you can buy at). This difference is how brokers make a profit from trades. The size of the spread can be influenced by various factors, including market liquidity, the volatility of the currency pair, the time of day, and the size of the trade you’re making. In general, more liquid pairs tend to have tighter spreads.
Pips, or “percentage in point,” are the smallest price move that a given exchange rate can make based on market convention. Most currency pairs are quoted in pips, which allows traders to communicate price changes more easily. For example, if the EUR/USD changes from 1.1000 to 1.1010, it has moved 10 pips. Typically, currency pairs are quoted to the fourth decimal place, but for pairs involving the Japanese yen (JPY), a pip is represented by the second decimal place. Additionally, movements in certain currency pairs, like some crosses, are quoted in deci-pips, which is one-tenth of a pip, allowing for even smaller changes in price.
Understanding spreads and pips is crucial for managing your trading strategy and assessing the costs associated with entering and exiting trades in the forex market.
How does leverage and margin work with forex?
When you trade in the forex markets, leverage allows you to control a larger position with a smaller amount of capital. This practice is often referred to as trading “on margin.” Essentially, leverage multiplies your buying power, enabling you to open positions that are significantly larger than your actual investment. For instance, if you’re offered a leverage ratio of 5:1 on a currency pair, this means you would need to put down only 20% of the total trade value as a deposit to open your position. So, if you wanted to trade a $10,000 position, you would only need to deposit $2,000 as margin.
While leverage can amplify potential profits, it also comes with increased risk. Since you are effectively borrowing funds from your broker to increase your market exposure, even small fluctuations in the currency pair can lead to significant gains or losses. This risk is especially pertinent for beginners, who may not yet have a firm grasp on market movements and how they can impact their trades.
It’s crucial to approach leverage cautiously. Many traders, especially those new to forex, are advised to minimize their use of leverage until they gain more experience and confidence in their trading abilities. Proper risk management strategies, including setting stop-loss orders and managing position sizes, can help mitigate the risks associated with leveraged trading.
How to read charts/what are forex signals?
One of the most common ways forex traders monitor the markets and identify trading opportunities is through technical analysis.
Technical analysis is a visual method that employs charts to examine past price movements and volume in order to predict potential future price actions. The main objective of technical analysis is to utilize available price charts to observe price action and identify trends of support and resistance in the market. It’s important to remember that technical analysis operates on probabilities rather than certainties, meaning that while patterns may suggest future trends, they are not guaranteed.
Technical analysis can be utilized to perform several key functions:
Exit a Trade: Traders can decide their exit strategy before entering a trade based on insights gathered from the chart.
Ride a Trend and Recognize Trend Reversals: Trends can either be upward or downward, and understanding how these trends shift is crucial for making informed decisions.
To effectively use technical analysis in forex trading, it’s beneficial to become familiar with three primary types of charts:
Candlestick Charts
Candlestick charts are the most widely used trading charts on forex trading platforms. They illustrate the high-to-low range of a currency pair’s value within a specific timeframe, showing how open and close prices move throughout the day. Each candlestick consists of two main components: the “wick” and the “body.”
- The “wick” indicates the high and low prices for the period.
- When the market price is trending upwards, the candlestick is typically green or blue; conversely, when it trends downwards, it turns red.
- The thicker part, or the “candlestick” itself, represents the opening and closing prices of the currency pair within that timeframe.
Understanding candlestick charts is essential for making informed trading decisions and effectively analyzing price movements in the forex market.
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