What Is Forex Trading And How It Works – A Beginner’s Guide

Are your friends earning a handsome profit by forex trading, but you always find it quite challenging? If yes, there is no need to worry because you are not alone.

Most beginners find it perplexing, especially if you have no prior information regarding the terms. This article has described all the basic things that a newbie must know. So, delve into the post. 

What Is Forex Trading? 

Daily, foreign currencies such as USD GBP either increase or decrease compared to the other currencies. And it is pretty apparent that when the value of things changes, the investors can benefit from it surely. 

The forex market has no opening and closing time, and it usually runs 24 hours a day. This attribute of the forex market makes it an extremely liquid market. 

This reality might surprise you that the forex market has vast volumes, and it is the biggest financial market on our planet. The daily traded volume of the forex market is way more than a stock exchange. 

For instance, the daily volume of the New York Stock Exchange is more than $1.1 trillion. On the other hand, most forex markets have traded volumes of $6.6 billion as per the Triennial Central Bank Survey of FX and OTC derivatives markets (2019).

How Forex Trading Works

Forex trading is identical to purchasing and selling several other securities such as stocks. The significant difference is that forex trading has currency pairs, for example, JPY/GBP (Japanese yen/British pound).

So, in forex trading, you sell one currency and purchase another, named forex trade. If the value of that currency goes up against the one you have sold, you will get a profit. So, it is imperative to learn all these complicated things to minimize the chances of loss in trading.

Important Terms Associated With Forex Trading

If you are a beginner and try to understand forex trading, it is worth learning the common terms widely used in Forex trading. It is not a piece of cake to comprehend forex trading, but if your concepts regarding the forex terms are clear. 

As a result, you will have to face fewer complications while learning forex trading. So, here we will discuss some common terms.

Currency Pair 

Currency pairs can be defined as the pairing of two currencies for trading on FX (Forex Exchange) or CFD platform, and in this pair, one currency is relative to the other one. For example, USD/GBP is the currency pair.


In layman’s terms, leverage can be defined as the utilization of funds you have borrowed from the trading account, and it assists you in enhancing your trading position. Leverage has some pros and cons.

Bid/ Ask Price

The bid price is the price at which a trader is consented to sell a currency price. On the other hand, the Ask price is when an investor or trader purchases a currency pair. The difference between both of these prices is named the spread.


The initial investment that an investor must need to open a position. It is worth mentioning that a margin provides traders an opportunity for opening a position of larger size.

Going Long/ Short

Going long or, in other words, purchasing a currency means that you hope that the worth of currency will likely increase in the future. Comparatively, going short is defined as the selling of one of the currencies from the currency pair with the expectations that its price will alleviate.


PIP or Percentage In Point is the smallest expected change between two currencies’ exchange rates. It is common in the forex trading market while selling and buying different currencies.

Lot Size

The Lot is defined as the unit used to measure the transaction amount in forex trading. If investors place orders on their trading platform, they are placed in sizes cited in lots.


Market sentiment offers a picture of the specific market’s performance or the whole stock market. If the price is increasing, then it depicts market sentiment as bullish. In contrast, if the price decreases, market sentiment is bearish.

Final Thoughts

To summarize the discussion regarding forex trading, we must say that the key to success for forex trading is knowledge. So, try your best to learn forex trading and make sure to keep updating yourself on all the latest news. 

We are optimistic that this article will prove helpful in making you understand the forex trading basics. Are you earning from forex trading? Share your experience in the comment section.

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