What is Forex Trading?

The term 'forex' is short for foreign exchange. Forex trading is the process of buying and selling international currencies, with the objective of making a profit from fluctuations in the exchange rates between them.

So you might trade the euro against the US dollar (EUR/USD), for example. Buying the EUR/USD pair means that you are effectively speculating on the euro to increase in price against the dollar. Most currency pairs are priced to the fourth decimal, so a single point (pip) of movement relates to the fourth decimal place.

The FX market is the largest in the world by global trading volume. It's open 24/5 and extremely liquid, so you can normally enter and exit trades whenever you want to. The high liquidity also means that spreads tend to be tighter than some less-liquid asset classes, so the underlying market won't have to move too far in a positive direction before your trade is in profit.

While movements in the currency market can be small – less than 1% average daily movement under normal trading conditions – the fact that they are traded to the fourth decimal creates a very fertile trading environment. Leverage offered by trading providers can also amplify retail traders' exposure by up to 200:1. This means that small moves in the underlying can create large profits or losses.