Forex Trading

How does forex trading work?

Forex is one of the most popular forms of investment, due to the high volatility and opportunities for massive profit.

In forex trading, you buy one currency and simultaneously sell another. This creates a currency pair – the two currencies that are being used to trade with each other.

These two currencies are usually reviewed in comparison to one another, and then classified within a potential profit range.

It's depicted in the forex market by first identifying one currency using its three-letter code, then naming the second currency paired with it by using its three-letter code as well, such as JPY for Japanese Yen.

Forex prices are known as rates, and they express the value of one currency in terms of the other. For example, when you buy British pounds (GBP) you are actually buying the British pound (GBP) and selling another currency – most likely the dollar (USD).

Currency and Pairs in Forex

Quote currencies are used in forex trading. You buy a currency with another, so you can receive the quote currency in exchange. For example, a price or rate in euro-dollar could be quoted as:

● GBP/USD= 1.24510

The currency on the left-hand side of a currency pair is the base currency. The currency to the right is the quote currency.

The pound to the dollar exchange rate is the number of US dollars that can be bought with one British pound. In the example above, a pound is equal to $1.24510USD.

However, when you sell currency, it tells you how many units of the quote currency you’ll receive in exchange for one unit of the base currency. For the example above, if you sell one British pound, you'll receive 1.24510 US dollars.

Other examples of currency pairs include EUR/GBP, USD/CAD, and EUR/CH.

NB: For trades using one of our free MetaTrader platforms, currency pairs are displayed on MT4 and MT5 without the slash (/) so you’ll see them communicated as GBPUSD instead of GBP/USD.

When can currencies be traded?

There is no day or night in the forex market, and it’s always open for trading. The forex market is unlike any other because it is active 24 hours a day, and it's open on 5 different days throughout the week.

The table below lists both GMT and EST trading times for the FX markets.

Eastern Standard Time (EST)
Region City Open (GMT) Close (GMT)
Europe London 3:00 am 12:00 noon
Europe Frankfurt 2:00 am 11:00 noon
America New York 8:00 am 5:00 pm
America Chicago 9:00 am 6:00 pm
Asia Tokyo 7:00 pm 4:00 am
Asia Hong Kong 8:00 pm 5:00 am
Pacific Sydney 5:00 pm 2:00 am
Pacific Wellington 5:00 pm 12:00 am

Greenwich Mean Time (GMT)
Region City Open (GMT) Close (GMT)
Europe London 8:00 am 5:00 pm
Europe Frankfurt 7:00 am 4:00 pm
America New York 1:00 pm 10:00 pm
America Chicago 2:00 pm 11:00 pm
Asia Tokyo midnight 9:00 am
Asia Hong Kong 1:00 am 10:00 am
Pacific Sydney 10:00 pm 7:00 am
Pacific Wellington 5:00pm 1:00am

When should I sell

A forex trader would typically open a short position, also called a sell order, when they believe that a specific currency pair will decrease in value. When a trader places a sell order they are basically agreeing to sell the base currency for the quoted object currency at a certain rate. The trader will wait until the value of the base currency falls below the agreed-upon rate and then close their position by buying back the base currency.

Now, let’s say you are a buyer of GBP/USD. You think the value of the USD will go down against the UK pound. You make a short position on GBP/USD by selling 30,000 GBP worth of USD and wait for the price to decrease.

Once the price of USD goes down, you expect it to go up again. So you close your short position by buying 30,000 USD. You sell the USD for UK pounds and earn a profit of £3,000: (100 x 3000 x USD/GBP) - (30,000 x 100) = 30,000.

The USD that you made on your short position is also known as “margin income.”

When should I buy

In currency trading, the opening of a buy or long position is referred to as buying a currency pair. A trader will open a buy or long position if they believe that the value of a specific base currency will increase. Technical analysis is used to generate position entry signals and academic theory is used to justify and predict how far prices should move once they have entered into a new trend.