Trading Essentials
Foreign Exchange - How Does The Market Work?
8 min read

About the Forex market 

Forex Market - It is the only truly continuous and non-stop trading market in the world. In the past, major institutional companies and financial institutions that acted on behalf of clients controlled the forex market. But now, things have changed. The forex market now includes traders and investors with a range of holding sizes.

One interesting aspect of the Forex market is that there is no physical building that acts as the trading venue for the market. Instead, it is a series of connections made through transaction terminals and computer networks. The participants in this forex market are institutions, investment banks, commercial banks and retail investors.

The Forex Market is considered quite “dark” compared to other financial markets. Why Currencies are traded on the OTC market, where disclosure is not required. Large pools of liquidity from institutional firms are a common feature of the forex market. 

One would argue that a country's economic parameters should be the most important criterion for determining a currency's rate. But not so. A recent survey found that the motives of major financial institutions play the most important role in determining the price of currencies.

Forex is traded primarily through three locations: the Forex Spot Market, the Forex Futures Market, and the Forex Futures Market. The spot Forex market is the largest of the three forex markets because it is the “fundamental” asset on which the futures and futures markets are based.

When people refer to the Forex market, they are usually referring to the spot forex market. The futures and futures markets tend to be popular for companies or financial firms that need to hedge Forex. 

What Is The Forex Market Used For? 


Foreign businesses are exposed to the risk of currency fluctuations when they buy or sell goods/services outside of their domestic market. The Forex market is a solution to hedge against currency slippage. By fixing an exchange rate at which the transaction is executed.

To do this, a trader can buy or sell currencies in advance on the Forex forward or swap market. This will lock in the exchange rate. For example, imagine that a company intends to sell US-made watches in Europe when the exchange rate between the euro and the dollar (EUR/USD) is at par between €1 and $1.

The watch costs $100 to make, and the company in the United States plans to sell it for 150 euros — a price competitive with other watches made in Europe. If successful, then the company makes $50 in profit on each sale because the EUR/USD exchange rate is even. Unfortunately, the US dollar started to appreciate against the euro until the EUR/USD exchange rate was 0.80, meaning it now costs $0.80 to buy 1€. 

The problem is that while it still costs them $100 to make the watch, the company can only sell the product at a competitive price of €150—when converted to dollars, it's only $120 (€150 × 0.80 = $120). A stronger dollar resulted in much less profit than expected. 

The watch company could have reduced this risk by shorting euros and buying US dollars when they were at par. That way, if the US dollar increases in value, the profit from the trade will offset the reduced profit from the sale of the watch shipment. If the US dollar depreciates in value, a more favourable exchange rate will increase the profit from the sale of the watch, offsetting the loss in the transaction.

This type of hedging can be done in the futures market. The advantage for Traders is that futures contracts are standardized by a central authority. However, currency futures can be less liquid than futures markets, which are decentralized and exist in a worldwide interbank system.


Factors such as interest rates, trade flows, tourism, economic strength, and geopolitical risks affect the supply and demand for currencies. The events that revolve around always create daily volatility in the Forex market. The opportunity to profit from the exchange rates is always changing by the day, by the hour. 

For example, predictions that one currency will weaken are essentially the same as assuming that the other currency in the pair will strengthen, since currencies are always traded in pairs.

Imagine a Trader who expects interest rates in the US to rise relative to Australia while the exchange rate between the two currencies (AUD/USD) is 0.71 (meaning it takes $0.71 to buy $1). AUD). The trader believes that higher US interest rates will increase the demand for USD and the AUD/USD exchange rate will therefore decrease as less USD will be needed to buy one AUD.

Assuming that the trader is right, and interest rates rise, reducing the AUD/USD exchange rate by 0.50. This means that the market will require USD 0.50 to buy AUD 1.00. If the investor had shorted the AUD and bought the USD, they would have profited from the change in the exchange rate.

Forex trading sequence

Forex trading is similar to trading stocks. Here are some steps to get you started on your Forex trading journey.

  • Learn Forex: Although not complicated, Forex trading is a completely separate market and requires specialized knowledge. The leverage ratio for Forex trades is also higher than for stocks. And, the factors that drive currency price movements are different from those that drive the stock market. 

  • Setting up an account with a Broker: You will need a Forex trading account at a brokerage firm to start trading. 

For beginner traders it is recommended to set up a trading account with low capital requirements, for example, you can start with a Cent account. Such accounts have variable trading limits and allow brokers to limit their trades to as low as 1,000 currency units. 

In a normal context, one standard account lot is equal to 100,000 currency units. The Cent account will help you become more comfortable with Forex trading and define your trading style. 

***Refer to Cent account details:

  • Develop a trading strategy: Although it is not always possible to predict and time the movements of the Forex market. Having a trading strategy will help you to set general guidelines and a trading route. A good trading strategy is based on the reality of your situation and finances. 

Remember, Forex trading is primarily a highly leveraged financial environment. But it is also more profitable for those willing to take the risk. 

  • Keep your Account up to date: When you start trading, always check your positions at the end of the day. Most trading software already provides a daily transaction accounting feature. Please ensure that you do not have any pending positions and that you have enough Balance to execute future trades.

  • Trade Emotional Balance: Beginner Forex trading is full of emotions and unanswered questions. Should you hold your position a little longer for more profit? Obsessing such unanswered questions can lead you down a path of confusion. 

That is why it is important not to get caught up in your trading positions and to cultivate an emotional balance between gains and losses. Be disciplined about closing your positions when necessary.    

Forex Trading Strategies

To start trading, it is not simply deciding to buy or sell without any strategy or analysis. Traders always use strategies based on fundamental or technical analysis, such as Break-outs and moving averages. Fine-tune your approach to the Forex market to suit each trader's trading style.

Scalping Trading - Surfing

Positions are held for a maximum of seconds or minutes and your profit is based on pips. Such trades are considered cumulative, which means that small profits are made in each of the individual trades combined. For a long time, the ant will be full of nests.

Scalping trading relies on the ability to predict price movements at a certain time or have important news. However, traders also tend to limit such trades to the most liquid pairs during the busiest trading times of the day. 

Day trading - Day trading

Day Trading is short-term trading in which positions are held and liquidated on the same day. The duration of a day trade can be hours or minutes. Day traders require technical analysis skills and knowledge of key technical indicators to maximize their profits. Similar to scalping, but in terms of time scale and profit factor, Day trading will be higher.

Swing trade - Medium-term trading

Traders hold positions for longer than one day; That is, they can hold positions for days or weeks. Swing trading can be useful during important government announcements or turbulent economic times. Since they have a longer time, Swing trades do not require constant monitoring of the market throughout the day. In addition to technical analysis, traders can assess economic and political developments and their impact on currency movements.

Position Trading - Long-term Position

Traders hold currency pairs for a long time, lasting months or even years. This type of trading requires more fundamental analysis skills as it provides a sound basis for trading.

Expert Advisor Trading - Automated Trading Using EA

You can combine the above trading strategies and automate them into an automated trading EA. Almost the whole EA will play the role of automating every process in trading and helping Traders to make profits. 

Each EA can calculate dozens of different factors to help traders make faster and more accurate decisions. For any trading strategy, Traders can personalize from Scalping to Position Trading.


The above interesting information hopes to bring you useful perspectives on the Forex Market. In recent years, traders as well as investors of various holding sizes have started to enter the market.

This shows that the Forex market is getting bigger and bigger and always opens up many access opportunities for everyone. For that reason, FXCE always opens up opportunities for Traders to capture the endless potential of the Forex market. Any piece of the puzzle can make the FXCE Ecosystem more valuable to the community.

Join FXCE today:


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