Forex trading, also known as FX trading, is the process of speculating on whether the value of one currency will rise or fall against another. While the term “forex trading” describes all dealings in the global foreign exchange market, when people ask, “What is forex trading?” they are usually interested in online retail forex trading, which is just a subset of this vast market.
Retail forex trading is when individuals like you and me trade currencies online through a broker on a computer or phone. While the process itself is practically identical to how professionals trade forex at institutions, the access to resources and information for retail forex traders is disproportionately smaller.
Definition of forex: 'Forex' (short for 'foreign exchange') is the interconnected market that encompasses all currency transactions around the world, such as massive trades between institutions and corporations as well as individuals swapping a few dollars for euros at the airport's exchange booth.
How Does Forex Trading Work?
Forex trading works by simultaneously buying one currency and selling another for the purpose of profiting from the potential movement in the exchange rate. If the currency you bought climbs, your trade will produce a gain. If, on the other hand, the currency you sold strengthens, you will take a loss on the trade.
Retail forex traders use an online broker to facilitate the process. The broker gives access to prices on the global, interbank foreign exchange market as well as tools and information needed to make trading decisions. Regulated brokers also provide a controlled amount of leverage, which traders can use to increase their exposure in the market without the need to provide the entire capital themselves.
Here’s how the forex trading process basically works:
- Sign up with a broker: Retail traders cannot interact directly with interbank pricing, so a forex broker acts as the intermediary. Through the broker, you can trade tiny positions at ultra-low costs.
- Log in to a trading platform: Once you open an account with a broker, you log in to a trading platform like MetaTrader 4 (MT4), MetaTrader 5 (MT5), TradingView, cTrader, or the broker’s proprietary trading app. This is where you can monitor prices in real time, read charts, analyse data, and enter trades.
- Place a trade: You pick a currency pair (e.g., EUR/USD), decide your direction, choose your position size, and click “Buy” if you think the first currency will rise, or “Sell” if you think it will fall.
- Broker executes the order: Once you place your trade, the broker executes your order, either by routing it to liquidity providers or filling it internally at the best available price.
How is forex trading different from converting currencies at a physical exchange office?
Exchanging money at a physical currency counter and online forex trading have different purposes:
- Online forex trading does not involve taking possession of any physical cash. Instead, you are trading contracts on prices quoted by liquidity providers solely for the purpose of speculating on price movements. The process often involves added leverage, which can magnify both gains and losses.
- Currency exchange offices are used to convert currencies for practical purposes such as obtaining cash for international travel. While technically you can use a physical exchange to speculate in forex, doing so would be costly and hugely inefficient.
What is the forex market?
The forex market is the global over-the-counter (OTC) network of institutions, banks, businesses, and individuals where the world’s currencies are bought and sold against one another. These entities access the forex market through this OTC network to convert currencies for trade, investment, or speculation.
The forex market is the invisible backbone of the global economy, the place where the value of every nation’s money is continuously valued, 24 hours a day, five days a week. This massive OTC network serves a critical real-world purpose in keeping global commerce running. When a US company buys goods from Japan, pays dividends to European shareholders, or a tourist in Thailand exchanges pounds for baht, all of those transactions flow through the forex market. Central banks participate to manage monetary policy and stabilise their currencies, multinational corporations use it to hedge billions in foreign revenue, and investment funds speculate for profit.
This massive trading volume leads us directly to one of the most important features of the currency market: liquidity.
Forex Market Liquidity
Forex market liquidity refers to the currency market's capacity to absorb large transaction volumes without a notable impact on price. Forex is by far the largest financial market on the planet and, therefore, the most liquid. For instance, the average daily turnover in Forex now exceeds $10 trillion (2025 Bank for International Settlements data). To put that in perspective, the New York Stock Exchange trades roughly $50–$100 billion per day, which means the forex market is 100 times bigger.
(Visual suggestion: show how large it is compared to stocks and bonds
For you as a trader, this high forex liquidity offers three distinct advantages:
- Fast Execution: Unlike trading a small company stock or real estate (where you might wait days or months to find a buyer), in forex, there is almost always a buyer or seller ready to take the other side of your trade instantly.
- Low Transaction Costs: High liquidity creates fierce competition among banks and brokers to offer the best prices. This results in tighter spreads, making it cheaper for you to enter and exit trades compared to other markets.
- Price Stability: Because the market is so deep, it is difficult for a single transaction to manipulate the price. While a wealthy investor might be able to move the price of a small cryptocurrency or penny stock, it would take billions of dollars to significantly move a major currency pair like EUR/USD.
Who Controls the Forex Market?
No single entity controls the forex market. It is a global network of financial institutions quoting prices directly to each other. Unlike stocks, the currency market has no centralised exchange where all transactions are processed. While governments and central banks can exert more influence than other participants, they do not control the forex market either.
This absence of a sole authority is not adverse to market functioning. However, it does carry the risk of more grey areas than there are in centralised markets. For example, insider trading is clearly defined as illegal in equity markets and is actively monitored within one regulatory framework. Currencies, in contrast, are not categorised as securities in the conventional legal sense, making insider trading regulations much more difficult to implement and enforce.
