Lesson 1: Introduction to Forex Trading
1.1 What Is Forex Trading?
Foreign exchange, commonly known as Forex, refers to the process of exchanging one currency for another. This happens for many reasons, such as international trade, travel, investments, and global business transactions.
Because currencies are constantly exchanged across borders, the Forex market has become the largest and most liquid financial market in the world. According to the Bank for International Settlements, average daily Forex trading volume reached USD 7.5 trillion per day in 2022.
By comparison, global equity trading across all stock markets worldwide is significantly smaller. This massive size and liquidity make the Forex market highly efficient and generally more resistant to price manipulation than smaller financial markets.
This is one of the main reasons why many traders choose Forex trading over other asset classes.
1.2 Who Trades Forex?
In the past, Forex trading was mainly dominated by banks, financial institutions, hedge funds, and large corporations, as significant capital was required to participate.
Today, thanks to online trading platforms and retail brokers, individual traders can also access the Forex market with smaller capital requirements.
Retail traders participate in Forex trading for various reasons, including:
Seeking trading opportunities in rising or falling markets
Hedging currency exposure
Diversifying investment portfolios
Trading based on global economic or political events
As a result, Forex traders may include:
Individuals who trade outside regular working hours
Traders who understand how global currencies are interconnected
People interested in macroeconomics, interest rates, and global finance
1.3 How Does Forex Trading Work?
Forex trading involves buying one currency while selling another at the same time. The value of a currency pair changes based on supply and demand, economic conditions, and global events.
Simple Currency Exchange Example
Assume the exchange rate for USD/SGD is 1.34:
You exchange USD 1,000 and receive SGD 1,340
Two weeks later, the exchange rate changes to 1.30
Exchanging back to USD gives you USD 1,030.77
Your profit is USD 30.77, excluding fees or spreads
In real Forex trading, this process happens digitally, without physical currency exchange.
Example: Forex Trading in Action
Let’s say you trade USD/JPY, currently priced at 139.91.
You believe the US dollar will strengthen against the Japanese yen and open a long position worth USD 100,000.
Scenario 1: Price Rises
USD/JPY moves from 139.91 → 145.91
Price difference: 6.00
Profit: 100,000 × 6.00 = JPY 600,000
Converted to USD: USD 4,112.12
Scenario 2: Price Falls
USD/JPY moves from 139.91 → 129.91
Price difference: -10.00
Loss: JPY 1,000,000
Converted to USD: USD 7,697.63
If you had opened a short position, Scenario 2 would have resulted in a profit instead.
1.4 Common Forex Terminology
Before trading Forex, it’s important to understand commonly used terms:
Bid-Ask Spread
The difference between the buying price (bid) and selling price (ask). The spread represents a trading cost.
Contract for Difference (CFD)
A derivative instrument that allows traders to speculate on price movements without owning the underlying asset.
Currency Pair
Forex is traded in pairs (e.g., EUR/USD). The first currency is the base, and the second is the quote currency.
Exchange Rate
The price at which one currency can be exchanged for another.
Leverage
A tool that allows traders to control larger positions with smaller capital. While it increases market exposure, it also increases risk.
Long Position (Buy)
Opened when expecting the base currency to increase in value.
Short Position (Sell)
Opened when expecting the base currency to decrease in value.
Lot
A standard trading size.
Standard lot: 100,000 units
Mini lot: 10,000 units
Micro lot: 1,000 units
Pip
The smallest price movement in a currency pair, usually 0.0001.
1.5 Types of Currency Pairs
There are approximately 180 currencies worldwide, but most Forex trading revolves around a few major ones.
Major Currencies
USD (US Dollar)
EUR (Euro)
GBP (British Pound)
JPY (Japanese Yen)
CAD (Canadian Dollar)
Major Pairs
Pairs involving the US dollar with another major currency.
Examples: EUR/USD, USD/JPY, GBP/USD
Advantages:
High liquidity
Tight spreads
Lower transaction costs
Minor Pairs
Pairs that do not include the US dollar.
Examples: EUR/GBP, GBP/JPY, CHF/JPY
These may have:
Higher volatility
Wider spreads
Diversification opportunities
Exotic Pairs
Pairs involving a major currency and a developing-market currency.
Examples: EUR/TRY, EUR/SEK, EUR/CZK
Exotics often come with:
Higher volatility
Wider spreads
Increased risk
Popular Forex Nicknames
“Cable” – GBP/USD (named after transatlantic cables used for pricing)
“Fiber” – EUR/USD (modern successor to Cable)
“Loonie” – USD/CAD (named after the loon bird on Canadian coins)
Module Recap
Forex is the largest and most liquid financial market globally
Trading is done using currency pairs
Traders can go long or short
Major, minor, and exotic pairs offer different risk profiles
Leverage allows larger exposure but increases risk
CFDs enable trading without owning the underlying currency