TradingCenter’s Guide to the Forex Market
The FOReign EXchange is a global market where one currency is traded for another. The Forex market has no physical location, as transactions are conducted through the electronic network of banks (ECN). Anyone with a computer and internet access can trade currencies through a Forex broker.
- The Forex market operates 24 hours a day, five days a week, from Monday to Friday
- The daily turnover exceeds 7 trillion US dollars (BIS Triennial Survey -2022)
🕰 Introduction to the Foreign Exchange Market
The Foreign Exchange market emerged in the 1970s when the global currency trading system shifted from fixed exchange rates to a floating-rate system. The fixed exchange rate system was established in 1944 under the Bretton Woods Agreement.
The History of Exchange Rates 1944-2025
This is the history of modern exchange rates, spanning from the 1944 Bretton Woods Agreement to nowadays (press the slider).
1944: The Bretton Woods Agreement establishes a fixed exchange rate system where major currencies are pegged to the US dollar, and the dollar is convertible to gold at $35/ounce. 🔗 Historical Perspective on Gold Prices 1958: European currencies become fully convertible, facilitating international trade. 1960s: Growing US deficits and inflation strain the system, leading to doubts about dollar-gold convertibility. 1971: US President Nixon suspends gold convertibility ("Nixon Shock"), ending the Bretton Woods system. 1971: Smithsonian Agreement adjusts currency pegs but fails to stabilize the system. 1973: Major currencies transition to floating exchange rates. 1973–1974: Oil crisis causes volatility, and the USD weakens due to inflation. 🔗 Crude Oil Trading 1976: The Jamaica Agreement formalizes floating exchange rates under IMF rules. 1980–1985: Volcker Shock (USD grows stronger due to the Fed’s high rates) 1985: Plaza Accord (Sept.) – G5 nations intervene to weaken the USD. 1987: Louvre Accord (Feb.) attempts to stabilize exchange rates. 1992: The Maastricht Treaty sets the stage for the euro. 1992: Black Wednesday – George Soros crashes the UK pound out of the ERM. 1994: Mexican Peso Collapse. 1996: The start of Online Trading. 1997–1998: Asian Crisis – Asian currencies crashed. 1998: Russian Ruble Crisis – Russia defaults and the Ruble devalues. 1999: Euro introduced electronically (EUR/USD launches at ~1.18 EURUSD). 2002: Euro notes and coins enter circulation. 2002–2008: Commodity-driven currencies strengthen (AUD, CAD). 2008: Financial Crisis – USD surges and EUR/USD drops from 1.60 to 1.25. 2010–2012: EU Debt Crisis – EUR weakens amid the debt crisis of the South. 2015: Swiss Franc De-Peg – CHF soars after SNB abandons EUR/CHF peg. 2016: Brexit – GBP falls from 1.50 to 1.30 vs. USD. 2020: COVID Pandemic – USD initially surges, then weakens due to Fed stimulus. 2022: Ukrainian War – EUR weakens on energy crisis.
Currency Symbols
The table below (press the slider) shows the symbols of the major international currencies.
Table: Major Currency Symbols Forex Currency Symbols US Dollar Index Wieght (*) EUR € 57.6% USD $ x GBP £ 11.9% CNY/RMB CN¥ x JPY ¥ 13.6% CHF fr 3.6% AUD $ x CAD $ x NZD $ x RUB ₽ x BRL R$ x SEK kr x DKK kr x NOK kr x SGD $ x (*) The U.S. Dollar Index (USDX, DXY, DX) is a Forex market benchmark that measures the value of the U.S. dollar relative to a weighted basket of other major currencies.
Forex Market Hours & Session Overlaps
The Foreign Exchange Market operates 24 hours a day, 5 days a week (24/5). The trading sessions for each major market are as follows (in GMT and EST):
Forex Trading Hours Australia (Sydney) Session: 10 a.m. – 7 p.m. (GMT) 5 p.m. – 2 a.m. (EST) Tokyo Session: 12 a.m. – 9 a.m. (GMT) 7 p.m. – 4 a.m. (EST) Hong Kong / Singapore Session: 1 a.m. – 9 a.m. (GMT) Frankfurt Session: 7 a.m. – 4 p.m. (GMT) London Session: 8 a.m. – 5 p.m. (GMT) Forex Session Overlap A session overlap occurs when the trading hours of two financial centers intersect. During a session overlap, trading volume increases, which typically leads to higher liquidity and greater volatility. London and New York: 1 p.m. – 5 p.m. (GMT) - 8 a.m. – 12 p.m. (EST) Tokyo and Sydney: 12 a.m. – 7 a.m. (GMT) - 7 p.m. – 2 a.m. (EST) Tokyo and London: 8 a.m. – 9 a.m. (GMT) - 3 a.m. – 4 a.m. (EST)
Fx Market Volumes & Most Active Trading Centers
In its early years, the Forex market was relatively small. In 1977, the average daily turnover was just $6 billion. By 1987, this figure had surged to $600 billion per day, and by 1997 it reached $1.2 trillion daily. The growth continued, with daily turnover hitting $3.2 trillion in 2007, and today, it is estimated at $7 trillion daily (BIS, 2022).
The United Kingdom dominates Forex trading with 36% of daily activity, followed by the United States at 17% and Japan at 6%, establishing these countries as the main hubs of global currency trading. Chart: Market Share of Major Forex Centers
🔗 More » Forex Pairs & Statistics
🏛️ Forex Market Participants
There are two main reasons to participate in the international Forex market:
1) Hedging against Currency Risk
The Forex market provides opportunities to hedge against abnormal fluctuations in a particular currency. Currency risk is a market risk inherent in international activities. For example, a US importer who buys goods from Europe may hedge against exposure to the Euro–Dollar exchange rate. 🔗 Learn about Investment Risk
2) Market Speculation
Speculation in the Forex market is a common practice across the US, Europe, and Asia. Thousands of companies and millions of individual traders engage in daily speculation, seeking to profit from currency fluctuations. 🔗 Day Trade Resources
Participants
The Foreign Exchange (FOREX) market involves several categories of participants, ranging from central banks and institutional investors to retail traders and tourists:
Banks – central, retail, and investment banks. Institutional traders and investors – such as hedge funds, mutual funds, and pension funds. Retail traders – individual investors participating in currency trading. Day-trading speculators – traders seeking short-term profits from currency fluctuations. International and national companies – businesses engaging in cross-border trade and hedging currency risk. Forex brokers – including ECN, STP, and Dealing Desk brokers who facilitate trading. 🔗 ECN/STP Forex Brokers Tourists – exchanging currencies for travel purposes.
Forex Currency Analysis Methods
To analyze the Forex market, currency traders primarily employ fundamental analysis, technical analysis, and seasonal statistics.
1️⃣ FUNDAMENTAL ANALYSIS 🔗 More on Fundamental Analysis
Fundamental analysis examines economic and political factors related to a reference economy, as well as global trends that may affect currency values. Key variables include:
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Interest rates, Inflation, Unemployment rate, GDP growth, Industrial production, Public and private debt
Central banks and their monetary policies also play a crucial role, influencing international exchange rate fluctuations.
2️⃣ TECHNICAL ANALYSIS 🔗 More on Technical analysis
Technical analysis studies historical currency exchange rate movements to identify patterns and trends. It essentially measures market psychology. Many automated trading systems, known as FOREX robots, use technical analysis to trade without human intervention.
3️⃣ SEASONAL STATISTICS 🔗 Forex Pairs and Seasonality
Seasonality refers to periods when market data typically shows regular and predictable patterns. This book provides seasonal statistics for different financial assets.
• Any recurring price pattern tied to a specific time frame, such as a month, quarter, or year, is considered a seasonal pattern.
• Seasonality reflects historical averages and should not be relied on alone to predict future price movements.
Trading in the Foreign Exchange Market
Hundreds of different currency pairs are offered in the Forex market. However, the three major pairs in terms of liquidity are EUR/USD, USD/JPY, and GBP/USD. These three pairs are characterized by liquidity, high volume activity, and tight spreads.
| » EURUSD | » GBPUSD | » USDJPY | » USDCHF | » USDCAD | » AUDUSD |
Capital Leverage
Forex trading offers high leverage, up to 30:1 for EU residents and even higher for non-EU residents. Leverage carries significant risks, especially for traders who lack risk management skills. This is because leverage not only magnifies potential returns but also increases trading risks and costs.
Trading Platforms
MetaTrader is the Forex market's standard trading platform. It comes in two versions, MT4 and MT5, and offers advanced tools for technical analysis and a flexible user interface. MetaTrader supports automated trading, expert advisors (EAs), backtesting, and a variety of pending orders.
| 🔗 MetaTrader-4 (MT4) | 🔗 MetaTrader-5 (MT5) |
Forex Trading Strategies
Here is a table featuring leading Forex trading strategies with concepts, timeframes, and tools.
Table: Key Forex Trading Strategies
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Forex Strategy |
Objectives | Timeframes | Tools / Indicators |
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15 minutes → 4 hours |
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Daily → Weekly |
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Weekly → Monthly |
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1 minute → 1 hour |
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Seconds → 5 minutes |
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Weekly → Monthly |
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Different Ways to Trade the Forex Market
Here are four different ways to participate in the Forex market:
(1) FX SPOT TRADING The spot market represents a direct transaction between a buyer and a seller. This type of transaction consists of cash and is delivered after two days (T +2). Note that in some cases, rates apply to a single delivery day (T +1). FX Spot Trading activity is the largest segment of the Forex market and is carried out through banks' electronic networks. (2) FORWARD CONTRACTS A currency transaction through a Forward Contract is a “closed” agreement between two parties that is delivered in the future. The buyer and the seller agree today to the terms of delivery, but the actual delivery takes place on a pre-specified future date. The duration of a Forward Contract can range from one day to several years. Forward-type contracts are similar to Futures contracts (discussed below), except that a Forward Contract is not traded on any market. Usually, a Forward agreement consists of a bank on one side and a large company or private investor on the other. (3) SWAP CONTRACTS (FOREIGN EXCHANGE SWAP & CURRENCY SWAP) In a SWAP-like transaction, a sale order of a currency and a purchase order of another currency are placed at the same time. At a specified date in the future, the two sides (buyer and seller) reverse the transaction. This method is mainly used for hedging against periodic currency risk. (4) CURRENCY FUTURES & OPTIONS CONTRACTS Futures contracts can be bought in most international markets. Futures contracts are standardized agreements traded like common financial securities. Futures are delivered in the future, usually after several months. Futures require a percentage of the total transaction as collateral (margin), typically 5–15%. Margin may be adjusted depending on market movements (Margin Call). Futures can be used for hedging or speculation. Options, unlike futures contracts, expose the holder to a fixed risk. An option buyer has the right, but not the obligation, to carry out a transaction in the future. No margin calls apply. An option contract is delivered at a specified price on a specified future date. Options are used for hedging risk but mainly for speculation.
Automated Forex Trading
Automated trading is a branch of systematic trading that combines computer software and hardware to generate continuous trading activity without human intervention. While all automated trading systems are systematic, not all systematic systems are automated. 🔗 Automated Forex Trading Strategies
Liquidity, high trading volume, and very tight spreads create an ideal environment for implementing automated trading systems. An automated Forex trading system analyzes key market data, such as price and volume, to identify and trade short-term trends. By applying technical analysis, the system examines supply and demand dynamics and compares them to historical price behavior, deciding what and when to trade without human intervention.
What is an Expert Advisor (EA)?
An Expert Advisor (EA), also known as a Forex Robot, is a set of programmed analyses and techniques, including indicators, special filters, and rules. When all tools align to forecast the direction of a trend, a trading order is executed automatically. Trades can be bullish or bearish, designed to operate in any market condition.
🔗 More: » Forex Expert Advisors (EAs) | » Trading Platforms
ECN/STP Forex Brokers
Forex brokers are firms that provide their clients with access to the Foreign Exchange market. There are two main categories of brokers:
ECN/STP Brokers (No-Dealing-Desk)
- ECN/STP brokers send their clients’ orders directly to the global currency market without human intervention. An ECN (Electronic Communications Network) broker is electronically connected to a network of banks, while an
- STP (Straight-Through-Processing) broker routes client orders electronically to a liquidity provider.
Market Makers (Dealing-Desk Firms)
- A Dealing-Desk (DD) broker creates a market within the market. This type of broker acts as an intermediary between the trader and the Forex market.
🔗 More: » Forex Brokers | » Forex Regulators & Compensation Schemes
■ The Foreign Exchange (Forex) Market
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