What is Forex Market & How does it Work?

what is forex market and how does it work?

You can learn everything about trading. This is the first chapter of the Beginner Course, we are going to talk about The Forex Market.

In this chapter, you will learn about:

  • Basic Knowledge Of The Forex Market
  • What Is Currency Pairs
  • How The Forex Market Works
  • Types Of Markets
  • Correlation Between Forex And The Economy
  • How You Can Profit From It


Currencies are traded worldwide in the
major financial centers of Frankfurt, Hong
Kong, London, New York, Paris, Singapore,
Sydney, Tokyo, and Zurich—across almost
every time zone.

This means that when the U.S. trading day
ends, the forex market begins anew in Tokyo
and Hong Kong. As such, the forex market
can be extremely active any time of day, with
price quotes changing constantly.

The foreign exchange market is where
currencies are traded. Currencies are
important because they enable the purchase
of goods and services locally and across
borders. International currencies need to
be exchanged to conduct foreign trade
and business.
For instance, during traveling a French
tourist in Egypt can’t pay in euros to see
the pyramids because it’s not the locally
accepted currency. The tourist has to
exchange the euros for the local
currency, in this case, the Egyptian pound,
at the current exchange rate.

What is The Forex Market?

Forex Market stands for Foreign Exchange market,
where currencies are traded.

  • International currency exchanged for foreign trade and businesses
  • Most currency transactions occur for speculative purposes on global markets
  • Currency traders buy and sell currencies to expect financial gain.

Forex Trading

Most forex traders aren’t made for the
purpose of exchanging currencies but rather
to speculate about future price movements.

Similar to stock traders, forex traders also
buy currencies whose values they think will
increase relative to other currencies

Most of the currency transactions that
occur in the global foreign exchange
market are bought (and sold) for
speculative reasons.

Currency traders buy currencies hoping
that they will be able to sell them at a
higher price in the future.

If you think one currency will be stronger
versus the other, and you end up correct,
then you can make a profit.

Currency Pairs

Currencies are important because they
enable the purchase of goods and services
locally and across borders.

International currencies need to be
exchanged to conduct foreign trade and

Currencies are traded in pairs in the forex market.
Some common currency pairs that are traded are:

  • European Euro to US. Dollars.
  • Great Britain Pound Sterling to US. Dollars.
  • US. Dollars to Japanese Yen.
  • Great Britain Pound Sterling to Canada Dollars.

And any more….

How Does The Forex Market Work?

Let’s use an everyday example to explain
how you can actually profit from this.

  • Say you live in Europe and went on holiday to the United States.
  • You changed your 500 Euros into US Dollars at a rate of 1.4 dollars for every Euro. You got 700 US Dollars, but you did not spend any money at all. So, you still have 700 US Dollars after you come back.
  • When you came back, the exchange rate moved from 1.4 to 1.3 instead of getting just 500 Euros back, you actually got538.5 Euros.
  • You have gained 38.5 Euros simply from holding your money in dollars while the exchange rate changed.

This is essentially how we trade in
We buy a certain amount of a currency,
hold on to it whilst the exchange rate
moves and change it back making
money along the way how to decide
when the right time to buy and sell.
Many factors are involved in moving the
exchange rate. Some categorized it into
technical-side, fundamental-side, and
even sentiment-side.
The major factor in the fundamental
side is the economy.


Currency values depend on the
the economic factor of each country.
Deep understanding of the global
economy and macroeconomic
factors between countries will
help you understand the
movements of currency pairs.

Some of the most important fundamental economic factors that affect the forex market are:

  • Interest rate
  • Inflation rate
  • Unemployment rate
  • Trade and capital balance
  • Economic strength

3 Different Types of Markets

Spot Market

This is the primary forex market where those currency pairs are swapped and
exchange rates are determined in real-time, based on supply and demand.

Forward Market

Instead of executing a trade now, forex traders can also enter into a binding (private)
contract with another trader and lock in an exchange rate for an agreed upon amount of
currency on a future date.

Futures Market

Similarly, traders can opt for a standardised contract to buy or sell a predetermined
amount of a currency at a specific exchange rate at a date in the future. This is done on
an exchange rather than privately, like the forwards market.

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