
Forex trading is the process of buying and selling currencies in the global marketplace. It is also known as foreign exchange trading. With an average daily trading volume exceeding $6 trillion, the forex market is the largest and most liquid financial market in the world.
If you’re new to this part of the financial world, you may be wondering, what is forex trading and how does it work? In this guide, we’ll explore the basics of forex trading, how the market operates, the key participants, and strategies to help you get started.
What is Forex Trading?
Forex trading refers to the act of exchanging one currency for another in the hopes of making a profit. This trade occurs in currency pairs—such as EUR/USD or GBP/JPY—where one currency is bought while another is sold. The forex market operates 24 hours a day, five days a week, allowing participants from all over the globe to engage in trading during overlapping time zones.
The core concept behind what is forex trading is based on the fluctuation in currency values. For example, if you believe that the euro will increase in value against the US dollar, you can buy euros while selling dollars. When the euro strengthens, you can sell it at a higher price and make a profit. Similarly, you can short a currency if you anticipate its value will decrease.
How Does Forex Trading Work?
The structure of the forex market is decentralized, meaning it doesn’t have a central exchange like the stock market. Instead, trading happens electronically over-the-counter (OTC) between participants worldwide. Traders buy and sell currency pairs, and the market operates across different financial institutions, brokers, and individual traders.
Forex meaning revolves around currency pairs that are quoted in two prices: the bid and ask price. The bid price represents the price at which the market is willing to buy a currency, while the ask price is the price at which the market is willing to sell. The difference between these two prices is known as the spread, which is how brokers make money.
Major Currency Pairs in Forex Trading
The forex market consists of various currency pairs, but they are generally categorized into major, minor, and exotic pairs. The most commonly traded pairs, known as the majors, always include the US dollar (USD) and are considered the most liquid:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
Minor pairs involve major currencies but do not include the US dollar, such as EUR/GBP or AUD/JPY. Exotic pairs involve a major currency paired with a currency from an emerging or smaller economy, such as USD/ZAR (US Dollar/South African Rand).
Key Concepts in Forex Trading
There are several fundamental concepts that you must grasp when learning what is forex trading and how does it work. Understanding these terms will help you navigate the market effectively:
- Leverage: Leverage allows you to control larger positions with a smaller amount of capital. For example, with 100:1 leverage, you can control $100,000 worth of currency with just $1,000. However, leverage also magnifies risk.
- Margin: Margin is the amount of money required to open a leveraged position. It acts as collateral for the broker in case of losses.
- Pips: A pip is the smallest unit of price movement in the forex market. For most currency pairs, one pip equals 0.0001 in price movement.
- Lot Size: Forex is typically traded in lots, which are standardized units of measurement. A standard lot is 100,000 units of currency, but mini and micro-lots of 10,000 and 1,000 units, respectively, are also commonly traded.
- Stop-Loss Orders: A stop-loss order automatically closes a trade when the price reaches a certain level, helping traders manage their risk and limit losses.

How to Start Trading Forex
If you’re ready to dive into forex trading, here’s a step-by-step guide to help you get started:
Choose a Reliable Broker
The first step is selecting a reputable forex broker like Defcofx who offers a robust trading platform and competitive spreads. Look for a broker that is regulated with platforms like MT4 or MT5.
Open a Trading Account
Once you’ve chosen a broker, you’ll need to open a trading account. This involves providing some personal information and proof of identity. Most brokers also offer demo accounts, where you can practice trading with virtual money before risking real funds.
Fund Your Account
After opening an account, deposit funds to begin trading. Most brokers accept various payment methods, including bank transfers, credit cards, and e-wallets.
Learn Forex Basics
Before placing trades, take the time to understand the basics of the forex market, such as how currency pairs work, how to read price charts, and how to calculate pips and lot sizes.
Develop a Trading Plan
A solid trading plan is essential for success. It should include your goals, risk tolerance, trading strategies, and rules for entering and exiting trades.
Popular Forex Trading Strategies
When you embark on your journey to understand what is forex trading and how does it work, you’ll need to adopt a strategy that aligns with your trading style and goals. Here are some popular strategies:
Day Trading
Involves making multiple trades within a single trading day, with positions typically closed before the market closes to avoid overnight risk.
Swing Trading
Swing traders hold positions for several days or weeks, capitalizing on medium-term price movements. This strategy requires a solid understanding of technical analysis and market trends.
Scalping
Scalping is a high-frequency trading strategy where traders aim to make small profits from quick trades, often lasting just seconds or minutes.
Position Trading
Position traders take a long-term approach, holding trades for months or even years. This strategy relies heavily on fundamental analysis and global economic trends.

Risk Management in Forex Trading
Proper risk management is key to long-term success in forex trading. Here are some essential risk management techniques every trader should employ:
Use Stop-Loss Orders
Setting stop-loss orders can protect your capital by automatically closing losing trades before they wipe out your account.
Limit Leverage Usage
While leverage can amplify profits, it also increases risk. Use leverage cautiously and avoid over-leveraging your positions.
Diversify Your Trades
Spread your risk by trading different currency pairs rather than focusing on just one. This diversification can reduce the impact of losses from a single pair.
Calculate Position Size
Determine the appropriate position size for each trade by calculating your risk per trade. A common rule is to risk no more than 1-2% of your account on any single trade.
Conclusion
In summary, what is forex trading and how does it work? Forex trading involves the buying and selling of currencies in a decentralized global marketplace. With the right knowledge, tools, and strategies, you can navigate the complexities of the market and become a successful trader. By understanding key concepts such as leverage, pips, and risk management, you’ll be better equipped to make informed decisions in the fast-paced world of forex trading.
At Defcofx, we’re committed to supporting you on your trading journey by offering the tools and services you need to succeed. With competitive leverage options, low fees, and fast support, we are here to help you achieve your trading goals. Ready to take the next step? Join Defcofx today and experience the advantages of trading with a trusted broker.
Here is What You Can Look Forward to When You Join Us
At Defcofx, we are dedicated to providing traders with the best environment to thrive. Here’s what you can expect when you choose Defcofx as your trading partner:
- High Leverage Options: Defcofx offers up to 1:2000 leverage, giving you greater flexibility to control larger positions with smaller capital.
- 40% Welcome Bonus: Start your trading journey with a boost! All first-time deposits of $1000 or more are eligible for a 40% welcome bonus.
- No Commissions or Swap Fees: We offer low spreads starting from 0.3 pips with no hidden costs, so you can focus on your trading strategy without worrying about extra fees.
- Global Reach: No matter where you’re located, Defcofx welcomes traders from all countries and offers multiple language options for a more inclusive trading experience.
- Fast Support and Withdrawals: Enjoy fast and efficient customer support, with withdrawals processed within just 4 business hours, including weekends. Our team is always here to assist you.
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