What Is Forex Trading?

Forex trading—or foreign-exchange trading—is the buying and selling of global currencies. Learn more about what forex trading is and how it works.


Veteran stock traders might know about pairs trading. Pairs trading involves taking a bullish position in one stock or index paired with a bearish position in another, essentially trading the value of one security relative to that of another.
The forex market is another way to access pairs trading. In Forex, however, traders use currency pairs, which essentially is trading the value of one currency relative to that of another currency. Each currency pair is the ratio of one currency's value to another currency's value.

What is forex trading?

Forex trading takes place in a dynamic, global market that is open virtually around the clock. Because foreign exchange rates are based on global interest rates as well as macroeconomic and geopolitical conditions, they're always fluctuating.
The forex market is not conducted on an exchange, which means there is no physical location where all currencies trade.
Before considering trading forex, here are some basics every trader should understand:

• Leverage: Forex trading involves leverage, meaning traders can take a position in a larger investment with a relatively small amount of initial capital. This allows for strong potential returns, but traders should be aware that it can also result in significant losses and losses greater than your initial investment.
• Nearly 24/6 market: Traders need to be responsive to market conditions and economic events knowing that they can trade almost 24 hours per day, 6 days per week, from Sunday to Friday.
• Liquidity: Forex is a very active market with an extraordinary amount of trading, especially in the major currencies. Trading more obscure pairs may present liquidity concerns.
• Trading: Forex currency pairs are traded in increments of 10,000 units, and there is no commission. However, the cost of the trade is reflected in the bid/ask spread.
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Forex trading and interest rate differentials

One way to think of a country's currency is similar to the way equity investors think of stocks. Higher stock prices typically (but not always) reflect investor confidence in a company's future. Likewise, higher currency values typically reflect investor sentiment in the health of that country's economy relative to other countries. Interest rates and interest rate differentials are one way to measure relative economic strength between countries. As rates or yields rise in the United States, banks and other investors might move money out of places that offer lower yields. For instance, if rates are low in Japan, investors might consider investing in what might be higher-yielding U.S. government bonds.
Capital movements across borders can be powerful forces that drive currencies higher and lower. Economic data and interest rates are two key fundamental drivers for this capital movement.