- Forex
- February 26, 2025
Table of Contents
The currency market is the backbone of international finance. With it, banks, organizations and individuals do the currency exchange. In 2024, it involved with $ 7,5 trillion traded each day making it one of the biggest liquid financial markets in the world.
The currency price fluctuations provide traders with opportunities, where conviction in their market analysis and strategy must reign supreme over flimsy luck to survive in this fast-paced arena.
How the Forex Market Works?
Forex deals differ from stock deals because they are not centralized through exchanges; they are decentralized and are simply managed over-the-counter (OTC). This means banks, brokers, hedge funds and individual traders deal directly, not via some central exchange.
Key Market Participants & Their Role
- Central Banks & Governments – Influence exchange rates with monetary policy.
- Institutional Investors & Hedge Funds – Large traders that can move the market.
- Retail Traders – Individual investors speculating on currency movements.
Trading Sessions & Market Hours
Operating round the clock, from Monday to Friday, the forex market can be grouped into three major sessions.
- U.S. Session (New York, Chicago) – Overlapping sessions where the last active trading hours occur during the London session.
- Asian Session (Tokyo, Hong Kong) – Best suited for pairs with USD/JPY, AUD/JPY, AUD/USD, NZD/USD, and EUR/JPY.
- European Session (London, Frankfurt, Zurich) – High liquidity and volatile trends.
Best Time to Trade: The best time to trade is the overlap between London and New York (8 AM - 12 PM EST), when markets witness the most liquid volatility.
Types of Currency Pairs & Their Market Impact
Forex pairs can be grouped into three classifications:
- Major Pairs: The most traded, including USD (e.g., EUR/USD, USD/JPY, GBP/USD).
- Minor Pairs: Major currencies dancing without USD (e.g., EUR/GBP, AUD/NZD).
- Exotic Pairs: A combination made up of a major currency with a currency from one emerging market (e.g., USD/TRY, EUR/ZAR).
Key Market Insights: Why Some Currencies Fluctuate More?
- USD Dominance: Over 88% of forex transactions involve the U.S. dollar.
- Euro Volatility: The EUR/USD pair accounts for nearly 28% of global forex trades.
- Emerging Market Risk: Exotic pairs have wider spreads due to economic instability.
Example: In 2022, the Turkish lira (TRY) collapsed against the USD due to high inflation and weak central bank policies, making it one of the most volatile forex pairs.
How to Start Trading Forex?
Let’s understand the steps to start forex trading.
1. Choose a Reputable Broker
A regulated broker ensures fund security and transparency. Look for:
- Regulatory oversight (CFTC, FCA, ASIC)
- Low spreads & commissions
- Secure trading platforms (MetaTrader 4/5, cTrader, TradingView)
2. Open a Trading Account
- Standard Account – Best for experienced traders.
- Mini/Micro Account – Ideal for beginners with lower capital.
- Demo Account – Practice trading with virtual funds before going live.
3. Execute a Trade
- Select a Currency Pair – Analyze market trends.
- Choose Trade Size – Manage risk exposure.
- Apply Stop-Loss & Take-Profit Orders – Automate exits to limit losses and lock in gains.
Top Forex Trading Strategies Used by Professionals
Here are a few forex trading strategies to apply once you want to get started.
1. Trend Trading : Traders follow price momentum using indicators like Moving Averages & MACD.
Example: If EUR/USD is in an uptrend, traders enter buy positions on pullbacks.
2. Breakout Trading : Traders enter trades when the price breaks key resistance or support levels.
Example: If GBP/USD surpasses a key resistance, it signals a potential upward breakout.
3. Scalping : Short-term trades are held for seconds to minutes, requiring quick execution and low spreads.
4. Swing Trading : Holds trades for days or weeks to capitalize on medium-term price trends.
5. Carry Trade Strategy : Profiting from interest rate differentials between two currencies.
Example: If the USD has a 5% interest rate and the JPY has a 0.1% rate, traders buy USD/JPY to earn overnight interest.
Risk Management Techniques to Protect Your Funds
Here are the various ways to manage risks associated with forex trading.
- Use Stop-Loss & Take-Profit Orders – Minimize losses and secure profits.
- Risk-Reward Ratio (2:1) – Aim for double the reward vs. risk per trade.
- Limit Leverage – Beginners should cap leverage at 10:1 to avoid major losses.
- Diversify Trades – Spread the risk by trading different currency pairs.
- Stay Updated on Economic News – Monitor interest rates, inflation, and geopolitical risks.
Real-World Forex Market Events & Their Impact
We have discussed above a few real forex market events along with their impacts.
1. Swiss Franc Shock (2015)
In 2015, the Swiss National Bank (SNB) surprised the market by removing its peg to the Euro, leading to a rise of 30% in the CHF in seconds; this wiped out billions in traders' losses and pushed a number of forex brokers into bankruptcy.
2. The black Wednesday of 1992
In 1992, George Soros sold short the British Pound and made $1 billion that day when the UK exited the ERM.
Note: To know one or more macroeconomic policies leads every trader toward choosing exceptional trades.
Key Takeaways
- Forex trading consists of speculation of currencies against each other on the basis of price variations.
- The market is open for trading 24 hours a week for five days a week with a good deal of liquidity on all major trading sessions.
- Use stop loss orders on leveraged trading and make wise use of options for market analysis.
- To successfully trade, one has to keep on learning and keeping a close watch on these trends globally.
FAQs (Frequently Asked Questions)
- Forex is centered on foreign currencies, and stocks involve company shares.
- Forex is traded 24/5, while stock markets are open for certain hours.
During those overlapping hours between 8 AM and 12 PM EST, commonly referred to as the London-New York session overlap, enjoy maximum liquidity.
Yes, because of volatility and the leverages involved. And use a risk management technique.
A minimum of $100 is required, although it is advised to put down between $1,000 and $5,000 for proper risk management.
Some common forex trading scams are:
- Brokers that operate outside any form of regulation,
- Ponzi schemes, and
- Fake AI trading bots.