Forex Trading Definition: What Is Forex Trading?

What Is Forex Trading? Definition

Forex trading definition: forex trading is the activity of speculating on fluctuations or changes in the value of currencies.

Since currency values change all the time, people who trade forex take advantage of these changes to make gains. A forex trader therefore either buys or sells a currency pair depending on how prices move.

Forex trading takes place on an over-the-counter market, which means investors and speculators buy and sell currency pairs directly.

Forex trading is also the type of trading in France that is most popular with beginner traders. The forex market is very easy to invest in, and forex trading is easy to understand: a training course is all it takes to grasp everything.

To go further, also read our guides “Forex Definition” and “Currency Definition“.

Forex Trading Synonyms

Here are some terms with the same meaning as forex trading: foreign exchange trading, currency trading and exchange rate trading.

A person who trades forex is called a forex trader. They may also be called a currency dealer.

Forex Trading Etymology

Trading is an English word meaning “commerce”. Forex is an English word that is a contraction of FOreign EXchange.

Basic Forex Trading Terms

Currency pair in forex trading – definition: A currency pair in forex trading is the value of one currency relative to another. For example, the euro and the US dollar as a currency pair are written EUR/USD.
CFD – definition: CFD stands for contract for difference. In forex trading, a CFD is a contract signed by a buyer and a seller. It states that the seller must pay the buyer the difference between the current value and the value of the underlying asset at a set expiry date.
Forex platforms – definition: Forex platforms are online brokerage sites where you can trade currencies and place currency orders. One of the best known is MetaTrader 4, a dashboard specialized in forex trading and technical analysis.
Forex trading margin – definition: Margin in forex trading is the amount required for a trader to open a position, with the possibility of using leverage. It is the portion of the notional value of a currency position that is committed in a trading account with a forex broker.

Indicators Used in Forex Trading

Lot or contract size – definition: A lot in forex trading is a set of units invested instead of a single one. Lots are used when a single unit is not enough for the trader because of its low value. Depending on the number of lots traded, the capital invested can be larger or smaller: more lots require more capital, and vice versa.
Spread – definition: In forex trading, the spread is the difference between two prices or rates, namely the difference between the buy price and the sell price of a financial instrument. The spread is used to measure a market’s liquidity. It is also how brokers earn money, so choose the best broker with the best spread to trade at a lower cost.
Quote – definition: In forex trading, a quote is the value of a currency pair at which a transaction was made. This value is the actual price of a transaction. For example, for the EUR/USD currency pair, the live price is $1.272.
Pip – definition: The pip is a very widely used unit in forex trading that measures the change in value between two currencies. PIP stands for “point in percentage” and refers to the smallest movement a currency can make. It corresponds to the 4^th decimal place of a currency’s value. Some currencies are exceptions, such as the yen, for which a pip corresponds to the 2^nd decimal place.

Forex Trading Techniques

Twin trading in forex – definition: Twin trading in forex is a risk-reduction technique based on opening n trades for each 1 position size.
Swap in forex trading – definition: A swap is a financial transaction in which two parties exchange cash flows over a period agreed in advance. It is therefore a financial product whose value is influenced by its underlying assets. Swaps are used for hedging or speculation.
Leverage in forex trading – definition: Leverage in forex means using debt to increase your investment capacity. With leverage, traders can trade with little capital to make profits. However, this technique is risky, because leverage can make traders lose a lot just as it can make them gain a lot.

How Does Forex Trading Work?

In forex trading for beginners, the trader makes money by speculating on the appreciation or depreciation of one currency against another. For example, with the EUR/USD currency pair, a trader buys euros and sells dollars. They only make gains if the euro appreciates against the dollar. Everything takes place on a forex platform.

The forex market is very volatile, which means currency values change constantly, and traders take advantage of these changes to make gains. Currency appreciation refers to one currency gaining value against another, so appreciation of the euro in the EUR/USD pair means the euro’s value is rising against the dollar.

What Is a Traded Currency in Forex, and Which Are They?

A currency traded in forex is one of the most widely used currencies in the world. Forex traders speculate on the value of these currencies to make gains.

The most widely traded currencies in forex include:

The US dollar,
The euro,
The pound sterling,
The Japanese yen,
The Swiss franc.

These major currencies are shown in pairs in forex using symbols such as:

EUR/USD for the euro and dollar,
GBP/USD for the pound sterling and US dollar,
USD/JPY for the dollar and yen,
USD/CHF for the dollar and Swiss franc.

There are other currencies that are common in forex trading and also deserve attention, namely the:

New Zealand dollar,
Canadian dollar,
Australian dollar.

These currencies are often paired with the US dollar to form NZD/USD, USD/CAD or AUD/USD.

What Is a Forex Trader? Definition

Forex trading participant – definition: A forex market participant is anyone who takes part in the currency market. A participant is not necessarily an individual, as financial institutions and organizations also trade forex.

The most common participants include:

Central banks,
Governments,
National banks,
Hedge funds,
Investment funds,
Brokers,
Professional and retail traders.

Among these participants, central banks have the most influence on currency values, because the central bank is the entity that supplies money in the country whose finances it governs. It therefore shapes supply on the market, and its decisions have significant impacts on the value of currency pairs.

Smaller participants such as individual traders have very little impact on their own. However, because there are so many of them, they can have some influence.

To understand forex trading properly, knowing the definitions is not enough; you also need to keep up with constant currency movements. To do so, using a platform such as MetaTrader 4 or MetaTrader 5 is recommended to get an overview of price changes.

What Is a Forex Trading Tool? Definition

Now that you know the definition of forex trading, it is important to know which tools are essential for trading. A forex trading tool is first and foremost an instrument with which the trader can carry out trading activities.

To trade forex, a trader needs several tools, including:

A Forex Trading Platform

A forex trading platform is a tool with which the trader takes positions on the markets and applies different trading strategies: MetaTrader 4, MetaTrader 5 and MetaTrader WebTrader.

Indicators and Expert Advisors

These are additional plugins the trader can add to MT4 or MT5. Both versions come with the MetaTrader Supreme Edition tool. These indicators can be customized to suit the trader.

What Is a Forward Exchange Contract in Forex Trading? Definition

Forward exchange in forex trading – definition: A forward exchange is a way of buying or selling currency in which the parties choose to separate the commitment date from the delivery date by two days. The contract for this transaction states the transaction value, the maturity, the currencies involved and the rate.

Forward exchange is useful for avoiding the risk of price movements. The principle is to fix today the price of a transaction that will take place at a later date.

Key Takeaways From the Forex Trading Definition

Forex trading means buying or selling currencies based on how they move. It is based on speculating on the value of currency pairs involving the euro, the dollar, the pound sterling, the yen or the Swiss franc.

Forex trading is very popular because of its simplicity and its liquidity. The forex market is open on business days, with quotes available 24 hours a day. Forex brokerage fees are also fairly affordable. All you need is to choose a good broker to start trading and understanding forex.