Global Foreign Exchange Market

The Foreign Exchange (FX) market represents the world's largest financial market, with a daily turnover of $6.6 trillion. The market has undergone a profound transformation, shifting from manual, offline transactions to sophisticated, electronic systems that offer comprehensive tracking and transparency.

Market Structure and Fundamentals

Currency trading is fundamentally simple: you buy one currency while selling another. However, the machinery behind this concept is highly complex. Unlike the New York Stock Exchange with its physical trading floor, the forex market is decentralized. It operates as a global network spanning financial hubs including New York, London, Hong Kong, and Tokyo. Trading desks operate across these centers, ensuring the market remains active five days a week, 24 hours a day. When Tokyo winds down for the day, London's already awake and getting going. Then New York takes over.

Forex Trading Mechanics

Currency Pair Structure

Buying one currency while selling another. In EUR/USD @ 1.1000: EUR is Base, USD is Quote.

Position Types

• Long: Buying base currency (betting it strengthens).
• Short: Selling base currency (betting it weakens).

Leverage & Lots

Leverage (e.g., 30:1) amplifies gains and losses. A 1% move on a leveraged position can impact equity significantly.

• Standard Lot: 100,000 units
• Mini Lot: 10,000 units
• Micro Lot: 1,000 units

Every currency receives a three-letter code established by the International Organization for Standardization (ISO). Key examples include USD (US dollars), EUR (euros), and GBP (British pounds). Exchange rates are quoted as currency pairs. When someone says EUR/USD is trading at 1.1000, they mean one euro buys 1.10 US dollars. The first currency listed—EUR in this case—is the base currency. The second is the quote currency (also called counter currency).

Forex Technology Revolution

The electronification of forex markets has completely transformed how currencies trade. This evolution exemplifies how technology has modernized markets globally, particularly illustrated by the Central Bank of Guinea's 2020 collaboration with London Stock Exchange Group (LSEG) to modernize its FX operations.

Historical Evolution of Trading Systems

LSEG's electronic venues now process about $460 billion in trades every single day.

Spreads and Transaction Costs

Spreads—the gap between buying and selling prices—determine your trading costs. For highly liquid pairs during active hours, spreads are exceptionally tight:

A pip represents the smallest price increment, typically the fourth decimal place (0.0001 for most pairs).

Margin Requirements and Leverage

Regulatory changes have influenced margin requirements since compliance tightened. For retail clients in regulated jurisdictions, initial margin typically ranges from 3.33% to 4% for major currency pairs, equating to leverage of 25:1 to 30:1. This means you can control positions worth 25-30 times your actual capital.

Professional clients meeting certain criteria can access higher leverage but forego certain retail protections, such as negative balance guarantees. A key industry trend: most reputable brokers no longer charge separate exchange fees or third-party fees for forex trades. The spread constitutes the primary transaction cost.

Forex Market Volatility

What causes volatility of currency pairs?

Most Impactful Economic Events

• Non-Farm Payroll (NFP) Systematically causes sharp price movements of 50-100 pips on EUR/USD. Vital employment data.
• Central Bank Rates Substantial influence on market volatility, reflecting critical economic policy.
• CPI (Inflation) Higher-than-expected CPI typically strengthens the respective currency (e.g., USD).
• GDP & Retail Sales Critical insights into economic health that directly influence valuations.

Technical Analysis

Support and Resistance Levels

Beginners should identify key support and resistance levels on their charts by locating extreme highs and lows that form trading range boundaries. Rather than treating these as perfect lines, experienced traders use zones—broader defined areas accounting for market noise. The basic principle involves entering long positions as price approaches support and short positions near resistance.

Confirmation is essential before entering trades. Wait for candlestick signals (bullish pin bars at support or bearish engulfing patterns at resistance) or indicator readings (RSI in oversold territory at support or overbought at resistance) before executing.

Technical Indicators for Entry Signals

• Moving Averages: Trend traders frequently use moving average crossover systems (short-term crossing long-term) for clear, objective entry points aligned with trend direction.
• Fibonacci Retracement: The Fibonacci golden zone (38.2% to 61.8%) acts as a high-probability reversal area. Draw from previous high to low and monitor retracement.
• RSI (Relative Strength Index): Identifies overbought (>70) and oversold (<30) conditions. RSI Divergence signals weakening trends.
• MACD: Professional traders often use the 3-10-16 configuration for responsiveness. Bullish signal: MACD crosses above signal line.
• Combining RSI and MACD: When RSI is overbought AND MACD crosses below signal line = strong bearish confirmation. This reduces false signals.

Entry Point Identification

• Momentum-Based Entries: Look for MACD spikes towering above previous peaks, followed by pullbacks into patterns like bull flags.
• Breakout Trading: Wait for decisive price breaks with increased volume. Confirm using volume indicators or RSI/MACD.
• Range Trading: When price oscillates in a rectangle pattern, buy support and sell resistance.

Setting Exit Points and Managing Risk

• Support/Resistance Exits: Set take-profit just below resistance (longs) or just above support (shorts).
• Trailing Stops: Follow positive price movements to capture profit if prices reverse.
• Stop-Loss Placement: Position beyond key levels, often using ATR (Average True Range) to account for volatility.