Forex: The currency market that shapes the global economy

Why forex is essential for traders?

The forex market is not reserved for large financial institutions. Many individual traders see it as a unique opportunity to generate gains, particularly through access to forex via online brokers. Unlike stock markets, forex offers several distinct advantages: lower entry costs, near-permanent accessibility (24h/24, 5j/7), exceptional liquidity, and the possibility to use leverage.

For businesses, governments, and financial institutions, the stakes are different. They use forex trading to facilitate international trade transactions, protect against fluctuations in exchange rates, or achieve macroeconomic goals. Speculators, on the other hand, find arbitrage opportunities due to interest rate differentials and constant price movements.

Understanding the fundamentals of the forex market

The forex (foreign exchange) represents the buying and selling of sovereign currencies and derivatives. It is the largest financial market in terms of volume and liquidity. Every day, millions of transactions are conducted through a decentralized network involving banks, brokers, businesses, and individual traders.

Exchange rate movements are influenced by many factors: economic conditions, geopolitical events, central bank monetary policies, interest rate differentials, and market sentiments. This multiplicity of variables makes the forex extremely dynamic and a generator of numerous opportunities.

Market structure and areas of activity

Unlike centralized exchanges like the NYSE, the forex market operates in a decentralized manner through the over-the-counter system (OTC). The main trading hubs are New York, London, Tokyo, and Sydney. This geographical organization ensures constant liquidity: as soon as one market closes, another opens elsewhere.

Participants interact directly with each other or through a massive interbank network. No single authority controls the market, which creates some regulatory complexity depending on the jurisdictions. Nevertheless, local supervision does not limit the global scope of trading.

Currency Pairs: How Does Trading Work?

Trading on the forex is done through currency pairs that express the relative price between two currencies. A pair consists of a base currency and a quote currency. For example, GBP/USD means “how many US dollars are needed to buy one British pound.” A rate of 1.3809 indicates that 1 £ = 1.3809 $.

The most liquid and traded pairs are referred to as “majors”: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. These pairs include major currencies such as the euro, yen, pound, and Swiss franc.

The units of measurement: pips and pdbts

In forex, the tiny fluctuations in prices are measured in pips (basis points). A pip represents the smallest possible movement. For EUR/USD or GBP/USD, it corresponds to 0.0001. In contrast, for pairs including the Japanese yen (USD/JPY), the pip is generally 0.01 due to the different decimal context.

Some brokers offer additional precision called a pipette, adding an extra decimal place. EUR/USD can thus display five decimals instead of four, allowing for more granular quotes.

Lots: buy and sell in standardized quantities

Currencies are exchanged in fixed amounts called lots. A standard lot represents 100,000 units of the base currency. However, traders have access to smaller formats to adjust their risk exposure:

• Standard lot: 100,000 units
• Mini-lot: 10,000 units
• Micro-lot: 1,000 units
• Nano-lot: 100 units

Access to micro-lots and nano-lots has democratized trading for small investors. Before this innovation, only large institutions could actively participate in the market.

Calculation of gains and losses

Thanks to the standardization of lots, calculating returns becomes simple. If you buy a standard lot of EUR/USD at 1.1938 and the rate rises by one pip (, your gain will be 10 dollars. Ten pips = 100 dollars in profit. This predictability makes risk management and strategy planning easier.

Leverage: amplify your gains ) and your losses (

One of the defining features of forex is the ability to use leverage. This tool allows traders to borrow capital from a broker to control positions much larger than their own funds would allow.

A leverage of 10x means that $10,000 of personal capital can control $100,000 of currency. A leverage of 50x turns $2,400 into $120,000 of purchasing power.

) How does the margin mechanism work?

To grant this loan, the broker requires a “margin”: a percentage of the borrowed capital that you must leave in your account to cover potential losses.

• 10% margin = 10x leverage
• 5% margin = 20x leverage
• 1% margin = 100x leverage

Leverage amplifies your gains AND your losses. Let's take EUR/USD: if you buy a standard lot ###100 000 €( without leverage, you need about $120,000. With a 50x leverage )2% margin(, you only need to deposit $2,400. A decrease of 240 pips )2 400 $( will completely liquidate your account. Thus, tiny movements become decisive.

Protect Yourself: Hedging Strategies in Forex

Even if you trade speculatively, the unpredictable fluctuations of exchange rates pose a risk. Companies constantly face this: a US exporting company must protect itself against a decline in the euro, for example. “Hedging” provides this protection.

) Use Futures contracts

Futures contracts allow you to lock in the exchange rate at which you will make a transaction in advance. If you enter into a contract to buy 100,000 EUR/USD at 0.8400 in one year, you are guaranteed to get that rate even if the market rises to 1.0000.

Concrete example: A eurozone exporter sells goods to the USA and anticipates a cash flow of $100,000 in six months. By entering into a Futures contract, he ensures he receives a stable amount in euros, regardless of market movements.

Options: increased flexibility

Unlike Futures, options offer the choice ###hence their name(. By paying a premium, you acquire the right to buy or sell a pair at a specified price, without obligation.

A British company selling in the United States can buy a GBP/USD option. If the pound appreciates, it does not use the option and benefits from the best market rate. If the pound falls, it exercises the option and hedges. It only loses the premium paid.

Covered Interest Arbitrage: Exploiting the Differentials

Global central banks set different interest rates. This difference creates arbitrage opportunities for savvy forex traders.

) Concrete steps of an arbitrage operation

Suppose EUR/USD = 1.400. The deposit rate in the eurozone is 1%, in the USA 2%.

Step 1: Identify the opportunity. €100,000 invested at 1% yields €1,000; $140,000 ###equivalent( invested at 2% yields $2,800.

Step 2: Hedge. You enter into a EUR/USD Futures contract at 1.4100 for one year.

Step 3: Execute. You sell €100,000 for $140,000 at a spot rate of 1.400. You deposit the dollars at 2% for one year, obtaining $142,800.

Step 4: Convert and compare. You convert EUR through the Futures contract at 1.4100, receiving €101,276.60. Net gain: €1,276.60 of guaranteed profit, minus the fees.

Why cover if gains are decreasing? Because you avoid the catastrophic risk of a dollar appreciation that would have wiped out your profits. Stability takes precedence over maximum gain.

Different Approaches to Forex Trading

) Spot trading This is the simplest form: you buy a pair and sell it. If USD/EUR moves from 1.10 to 1.12, you make an immediate profit.

Trading with leverage

You multiply your purchasing power by borrowing. Potential gains increase, but the risk of liquidation also rises.

Trading via derivatives

Options and Futures allow you to benefit from future movements without holding the currency today. They offer increased flexibility and risk control.

Arbitrage and interest gains

You exploit rate differences or temporary mispricing. These strategies require significant capital and vigilance, as opportunities disappear quickly.

The unique features of the Forex market

Geographic coverage: 180 globally recognized currencies create as many potential markets.

Massive liquidity: The transaction volume is unmatched by other financial markets.

Multiple price factors: Politics, economy, speculation, remittances—all influence simultaneously.

Nearly permanent hours: Open 24/7, 5 days a week. When New York sleeps, Tokyo comes alive.

Tight profit margins: Over-the-counter prices reflect fierce competition, resulting in reduced spreads but requiring significant volumes to benefit.

Where and how to start Forex trading?

You do not need a license or privileged access to trade. Free online brokers abound, bringing together millions of traders. You do not pay a direct commission, but the brokers benefit from a spread ###spread( between the price they offer you and the actual rate.

Advice for beginners: Prefer brokers that allow micro-lots. This flexibility enables you to test your strategies with a reduced capital before scaling up.

Make sure your broker is regulated and authorized. The decentralized nature of forex unfortunately also attracts unscrupulous players.

Conclusion: an accessible but demanding market

The forex represents a legitimate alternative to stocks or cryptocurrencies for traders looking to diversify. The democratization through online brokers and increasing competition have lowered the barriers to entry. Micro-lots and free brokers open the market to almost everyone.

Nevertheless, forex trading carries serious risks. Leverage amplifies gains, but also losses. Without a solid understanding of the mechanisms and risk management, you risk the rapid liquidation of your account.

Before you start, master the key concepts: pairs, lots, pips, leverage, hedging. Test your ideas on demo accounts. And above all, only risk what you can afford to lose.