The Basics of Forex Trading

Trade currency pairs (e.g., EUR/USD, GBP/JPY).

The base currency (first) is bought/sold against the quote currency (second).

Example: If EUR/USD = 1.10, 1 Euro buys 1.10 US Dollars.

No central exchange: Trading happens over-the-counter (OTC) via banks, brokers, and electronic networks.

How Forex Trading Works

A.Spot Forex (Immediate Exchange)

Trades settle within 2 business days (T+2) at current market rates.

Example: Buying 10,000 EUR/USD at 1.10 costs $11,000.

B. Forex Futures & Options

Futures: Contracts to buy/sell currencies at a fixed future date (traded on CME).

Options: Right (but not obligation) to trade at a set rate.

C. CFDs & Leverage

Trade price movements without owning currencies (using leverage up to 100:1).

High risk: Small price swings can magnify gains/losses.

Example Trade

1.Analyze: Trader expects the Fed to raise rates, boosting the USD.

2.Execute: Sells EUR/USD at 1.10 (betting EUR will fall vs. USD).

3.Outcome: Rate hike happens; EUR/USD drops to 1.05.

4.Profit: Closes trade, earning 500 pips (5% gain).